0

SM 323 B2

TEAM 4 Spring Semester 2013 April 18, 2013

HIBBARD, ALLEN, LEE, CHADWICK

Authenticity Statement and Intellectual Property Statement

This business plan is the original work of the undersigned. All facts and figures are authentic. All contributions from others have been appropriately acknowledged. We have not read, reviewed or used any past Core plans in any way in the development of our plan. We did not misrepresent ourselves to suppliers or to anyone else who contributed information to this plan. We each understand that the ideas, analysis and text contained in our plan are the collective intellectual property of our team.

Michael Buckley

____________________________

Dana Butterman

____________________________

William Byun

____________________________

Jiayu Cao

____________________________

Andrew Ju

____________________________

Natalie Meyer

____________________________

Dvisha Patel

____________________________

Diya Sengupta

____________________________

John Shapiro

____________________________

II

Table of Contents
EXECUTIVE SUMMARY CORPORATE SOCIAL RESPONSIBILITY INTRODUCTION AND OVERVIEW I II III

OPERATIONS MANAGEMENT 1 PRODUCT SPECIFICATIONS........1 CUSTOMER REQUIREMENTS......2 MANAGING COSTS.....2 SUPPLY CHAIN.....3 MAUNUFACTURING FACILITY.......5 ORGANIZATION.......7 ASSEMBLY PROCESS........9 QUALITY.......10 CAPACITY.........11 DEMAND AND INVENTORY......11 CONCLUSION......12 MARKETING 14 OBJECTIVES........14 SEGMENTATION......15 INTEGRATED MARKETING COMMUNICATION....17 PULL........17 PUSH.......21 MEASURING EFFECTIVENESS....22 CREATIVE.....23 CHANNELS AND PRICING.............24 SALES PROJECTIONS.....31 CONCLUSION.....32

INFORMATION SYSTEMS 33 IS OVERVIEW AND STRATEGY....33 WEBSITE DESIGN........33 SEARCH ENGINE OPTIMIZATION.....35 INTERNET MARKETING......35 INTERNAL OPERATIONS MANAGEMENT....36 VALUE CHAIN........38 INVESTMENTS......39

III

FINANCE 45 NPV AND IRR......45 FUNDING REQUEST.......45 MANAGAMENT AND INVESTOR OWNERSHIP......45 PROFITABILITY PROJECTIONS...46 BREAK-EVEN......47 CASH FLOWS......47 SENSITIVITY AND RISK ANALYSIS...48 OTHER RISKS.....50 PRODUCT UNIQUENESS......51 INVESTORS......51 TERMINA VALUE.........52 SCENARIO SUMMARIES......52 SCENARIO IMPLICATIONS.....54 CONCLUSION......55 CONCLUSION.56

IV

List of Exhibits
OM EXHIBITS 1 OM EXHIBIT 1:Product Design.......1 OM EXHIBIT 2: Nail Assistant.........1 OM EXHIBIT 3: Condensed House of Quality.....2 OM EXHIBIT 4: Target Cost Years 1 and 5......2 OM EXHIBIT 5: Make vs. Buy.......3 OM EXHIBIT 6: Supplier Map......3 OM EXHIBIT 7: Attachment Costs........4 OM EXHIBIT 8: Packaging Supplier Map......5 OM EXHIBIT 9: Supplier Contacts....6 OM EXHIBIT 10: Warehouse Layout......7 OM EXHIBIT 11: Year 1 Management7 OM EXHIBIT 12: Year 5 Management8 OM EXHIBIT 13: Assembly Process....9 OM EXHIBIT 14: Quality Inspections...10 MK EXHIBITS 14 MK EXHIBIT 1: Homeowners vs. Renters Handy Work...16 MK EXHIBIT 2: Magazine Cost and Awareness.17 MK EXHIBIT 3: Key Chain Giveaway....21 MK EXHIBIT 4: Year 1 Push Strategy...21 MK EXHIBIT 5: Logo...23 MK EXHIBIT 6: Pricing..25 MK EXHIBIT 7: ACV Breakdown.27 MK EXHIBIT 8: Manufacturing Representative....29 MK EXHIBIT 9: Sales Representative Salary...29 MK EXHIBIT 10: Sales Breakdown in Units.30 MK EXHIBIT 11: Sales Breakdown in Dollars....30 MK EXHIBIT 12: Sales Breakdown in Percentage30 MK EXHIBIT 13: Sales Breakdown by Retailer..31 MK EXHIBIT 14: Sales Projections Years 1-5..32 IS EXHIBITS 33 IS EXHIBIT 1: CSF 1....36 IS EXHIBIT 2: CSF 2........37 IS EXHIBIT 3: CSF 3........37 IS EXHIBIT 4: CSF 4........38 IS EXHIBIT 5: Value Chain......39 IS EXHIBIT 6: Entity-Relationship Diagram....41 IS EXHIBIT 7: Sample Reports (Market Sales Trend & Manufacturing Defect Rate).42 IS EXHIBIT 8: Process Modeling Diagram (Quality Control).43

V IS EXHIBIT 9: IS Investments44 FE EXHIBITS 45 FE EXHIBIT 1: NPV AND IRR 45 FE EXHIBIT 2: Income Statement Ratios...46 FE EXHIBIT 3: Income Statement Financial Rations..46 FE EXHIBIT 4: Accounting Breakeven (Includes Depreciation Expense).47 FE EXHIBIT 5: Cash Breakeven (excludes Depreciation Expense) ..47 FE EXHIBIT 6: Revenue and Cash Flow..48 FE EXHIBIT 7: Adjusted Purchase Intent when NVP=048 FE EXHIBIT 8: Awareness when NPV=049 FE EXHIBIT 9: ACV when NPV=0..49 FE EXHIBIT 10: Average Weighted Manufacturers..50 FE EXHIBIT 11: Sales Breakdown Base, Pessimistic, and Optimistic 53 FE EXHIBIT 12: Weighted NPV Calculation ........................................54

VI

List of Appendices
OM APPENDICES ii OM APPENDIX 1: Bill of Materials....ii OM APPENDIX 2: House of Quality.....iii OM APPENDIX 3: List of Raw Materials Defect Possibilities...iv OM APPENDIX 4: Cost of Goods Sold Years 1-.....iv OM APPENDIX 5: Staff Cost Years 1-5.....vii OM APPENDIX 6: Center of Gravity....ix OM APPENDIX 7: Facility Layout...x OM APPENDIX 8: Cycle Times........x OM APPENDIX 9: Capacity......xi OM APPENDIX 10: Quality Inspection Flow Chart......xii OM APPENDIX 11: Shipping Map...xii MK APPENDICES xiii MK APPENDIX 1: Segmentation Tree....xiii MK APPPENDIX 2: IMC Year 1....xiv MK APPENDIX 3: IMC Year 2....xv MK APPENDIX 4: IMC Year 3......xvi MK APPENDIX 5: IMC Year 4.....xvii MK APPENDIX 6: IMC Year 5....xviii MK APPENDIX 7: Profile of Retail Environment..xix MK APPENDIX 8: ACV Years 1-8..........................xix MK APPENDIX 9: Detailed BASES Case.......xx MK APPENDIX 10: Optimistic Case......xx MK APPENIDIX 11: Pessimistic Case......xxi MK APPENDIX 12: Logo......xxi MK APPENDIX 13: Billboard Ad......xxii MK APPENDIX 14: POP Display....xxii MK APPENDIX 15: Billboard and Bus Ad......xxiii MK APPENDIX 16: Packaging...xxiii MK APPENDIX 17: Magazine Ad..xxiv MK APPENDIX 18: Summary of Focus Group 1.....xxiv MK APPENDIX 19: Summary of Focus Group 2......xxv MK APPENDIX 20 Interviews................xxv IS APPENDICES xxvi IS APPENDIX 1: Best of Breed Comparison......xxvi IS APPENDIX 2: Middleware......xxviii IS APPENDIX 3: ERP Comparison.......xxix IS APPENDIX 4: Epicor ERP Software...xxx IS APPENDIX 5: Epicor ERP Hardware Requirements....xxx

VII IS APPENDIX 6: SG&A........xxxi IS APPENDIX 7: Website Cover Page....xxxi

FE APPENDICES xxxii FE APPENDIX 1: Base Case Startup Costs...xxxii FE APPENDIX 2: Base Case Income Statement...xxxii FE APPENDIX 3: Base Case Income Statement Financial Ratios..xxxiii FE APPENDIX 4: Base Case Cash Flows...xxxiii FE APPENDIX 5: Base Case Balance Sheet.....xxxiv FE APPENDIX 6: Optimistic Income Statement....xxxv FE APPENDIX 7: Optimistic Balance Sheet....xxxvi FE APPENDIX 8: Optimistic Cash Flows.....xxxvii FE APPENDIX 9: Pessimistic Balance Sheet....xxxviii FE APPENDIX 10: Pessimistic Income Statement..xxxix FE APPENDIX 11: Pessimistic Cash Flows..xl New Product Survey xli

VIII

EXECUTIVE SUMMARY
PRODUCT The ARES Work Glove is an innovative home improvement product that makes small projects quicker, safer, and more efficient. Our glove contains built in level and nail assistant attachments to make basic leveling and nailing tasks easier and more manageable for the user. Our ideal customer is a DIY home improver. Our glove is designed with their wants and needs in mind. The end result is a simple and efficient work glove that helps our customer offered at a low price.

OPERATIONS ARES strives to maintain operational excellence by keeping costs low and quality high, ARES looks to differentiate from the competition. All of our materials are bought from overseas suppliers in China. Direct shipping from Shenzhen port allows for low shipping costs of raw materials. The glove is outsourced to an experienced supplier who can produce our requirements at a fraction of the cost that we could. Rather than burdening ourselves with expensive fixed assets, almost all tasks are performed by hand with only basic sewing machines. Amongst these low costs, quality still prevails due to quality checks that include inspections on every finished good.

MARKETING Our target segment is comprised of 20 million homeowners who have a do-it-yourself mentality and value safety/efficiency while performing home improvement tasks. Through a unique marketing campaign by combining traditional print advertising with out of the box strategies; such as Google banner ads, buses and billboards, and trade fairs. We will use a marketing mix of push and pull to create product and brand awareness among end consumers as well as prospective retail clients. Our goal is to create 32.45% awareness by our fifth year with total marketing costs of $1,192,098.12.

IX INFORMATION SYSTEMS ARES Work Gloves information system strategy is to foster a strong relationship with our consumer, optimize our supply chain management capacity, and effectively coordinate our cross segment functions. We are focusing our attention on using our Internal Operations Management to minimize our defect rate, and coordinate the delivery of materials in a timely fashion. Our website and social media forums will develop a personal connection and ongoing dialogue with our consumer resulting in a personal connection with our brand. Our website will also allow consumers to provide us with feedback on our product. Lastly, we are using top of the line hardware and software to optimize our operations management, financial planning, and marketing campaigns.

FINANCE Assuming a 25% discount rate, we expect an NPV of $701,931 and a project IRR of 39%. Launching our company will require an initial investment of $295,600. Investors will contribute 75% of funds and own 55% of the company, while friends, family, and management will contribute 25% of funds and own 45% of the company. Both net income and cash flows will turn positive in year 5 with our peak cash flows coming in year 7. We expect the total product life cycle to be approximately thirty years, resulting in a 26% IRR for investors.

We will place our products in independent hardware stores and online through Amazon in the first two years. In year 3 our goal is to move into hardware chain stores like Ace, True Value, and Do It Best. For years 4 and 5 we plan on reaching high enough demand to move into the big box stores of Home Depot, Lowes, and mass merchandisers such as Walmart, Target, and Sears.

CORPORATION SOCIAL RESPONSIBILITY

HABITAT FOR HUMANITY ARES will be partnering with Habitat for Humanity for its Corporate Social Responsibility (CSR). Habitat for Humanity is a well-known organization that has tackled the issue of poverty housing around the globe. ARES will work with Windy City Habitat for Humanity, the Chicago affiliate office, to give back to the community. This initiative not only serves as a positive influence on our community, but it also includes benefits for our company. Constructing a home is not only a team-building activity but it also boosts employee morale and increases our presence in the local community. For the first five years of its existence, ARES will be unable to provide financial support to Habitat for Humanity and will therefore donate only its time.1

LOCAL COMMUNITY CLEAN UP In addition to partnering with Habitat for Humanity, Ares will participate in at least one local community clean-up initiative every year. These initiatives can include, but are not limited to cleaning up public parks, removing graffiti from buildings, and planting trees and flowers. Additionally, we will encourage our local customers to join employees in volunteering. This type of initiative benefits both the company and the community. The community gains several economic benefits from having a cleaner and more pleasant appearance such as increasing home values to attracting business investments. ARES will gain a better reputation and hopefully attract new customers. In our original CSR initiative, ARES promised to produce the glove using environmentally friendly materials. However we determined through our surveys that for respondents who would definitely not buy our product, using recyclable materials would not significantly increase their purchase intent. Therefore, we switched our CSR initiatives to those described above. We believe that these two are not only more relevant to our product but also more appreciated by current customers and a better influence on potential customers.

Habitat For Humanity March 27th 2013, http://www.habitat.org

XI

INTRODUCTION
MISSION Our mission is to facilitate home improvement projects by making them safer, more efficient, and easier to use. We understand that doing projects may be difficult at times and limit people from doing such tasks on their own. Our company strives to make this process easier and eliminate any inhibitions customers may have. ARES Work Glove Improving Home Improvement.

PRODUCT OVERVIEW The ARES work glove is an innovative home improvement glove that contains beneficial accessories to provide added safety and efficiency while working on domestic projects. Its main feature is the nail assistant, which is a small nail holder that extends between the index finger and the thumb. The holder will decrease the hazard of striking the fingers when hammering nails. The index finger and the thumb is also lined with extra rubber for backup protection in case of missing the mark. The glove is not only safer but more efficient as well. The nailing assistant allows for increased precision and speed. Project efficiency also stems from an additional level attached to the side of the glove and sandpaper attached to the knuckles. Our glove is marketed to male and female homeowners who are interested in Do It Yourself (DIY) projects at home. This includes a wide group of ages ranging from 30 to 55, in other words well-bodied individuals, enthusiastic about home improvement.

ECONOMIC TRENDS When the recession struck in 2008, the entire economic market declined, including the home improvement industry causing sales to fall 25%2. However, recently the market has been making a comeback and people have been spending more. As the housing market rebounds, home improvement sales have shot up. Home Depot saw its largest quarterly sales in 5 years at 1.5 billion dollars last August3. Since the recession, hardware stores have been more focused on

2 3

Mintel http://mintel.com http://usatoday30.usatoday.com/money/personalfinance/story/2012/09/26/home-improvement/57841932

XII helping consumers with smaller projects rather than relying on sales from professionals4. The increase in market spending and the new home improvement focus on small projects establish an optimal market for our new home improvement accessory product.

COMPETITION We compete with producers in two different categories, work gloves and small nail-holding tools. Our work glove is of high quality and competes with other quality glove manufacturers such as Ironclad and Gemplers. Additionally we also compete with tool manufacturers like Micro-Mark who produce tools that rival our nail assistant. However, these manufacturers are not taken into account because of the large difference in price and overall function.

Company

Product

Price

Strengths Nail Assistant,

Weaknesses

ARES Ironclad5 Gemplers MicroMark7

6

ARES Work Glove

$25.00 attachments, safety

Complex Thin material, little

Heavy Utility Double Palm Cowhide Leather Gloves

$26.99 Durable, strong grip Thick leather, $6.85 inexpensive

padding Not form fitting, cumbersome

Nail Holder

$3.95 Simple

Separate tool

Mintel Ironclad http://ironclad.com/products/gloves/hug-heavy-utility 6 Gemplers http://www.gemplers.com/product/21600/GEMPLERS-Double-Palm-Cowhide-Leather-Gloves 7 Micro-Mark http://www.micromark.com/nail-holder,7356.html

5

XIII

OPERATIONS MANAGEMENT PLAN

CORE B2 TEAM 4
Diya SenGupta, Jessica Cao, Andrew Ju, Luke Shapiro, William Byun, Michael Buckley, Natalie Meyer, Dvisha Patel, Dana Butterman

1 PRODUCT SPECIFICATIONS The Ares Work Glove is a pair of home improvement gloves with distinct attachments that make do-it-yourself projects simpler and safer. Special modifications are made to each of the gloves to enhance performance and efficiency. The left hand includes the majority of these adjustments, while the right hand remains free and flexible. As seen in OM Exhibit 1: Product Design, four adjustments are added to the left hand: a level, sandpaper, rubber padding, and a nail attachment. The level is embedded in the side of the glove to make the leveling process quick and efficient. Sandpaper on the knuckles allows users to quickly smoothen small surfaces without having to find misplaced sandpaper rolls. Extra rubber padding around the knuckles provides
OM EXHIBIT 2: Nail Assistant

OM EXHIBIT 1: Product Design

consumers with reassurance that despite inevitable accidents, their hands will be safe. The last and most unique attachment is the nail assistant. Detailed in OM Exhibit 2: Nail Assistant, it is a small plastic and rubber nail holder that connects between the pointer finger and thumb. Our product removes the difficult process of holding and setting a nail manually.

Not

only does it increase safety by relieving the index

finger and thumb from holding a nail in place, it ensures that the nail also enters its target perpendicularly, increasing consistency and precision. When not in use, the nail assistant can conveniently buckle onto the back of the left glove. The right-hand glove is unencumbered by

2 attachments; instead three fingers are fingertip free, allowing for increased dexterity and sense of touch.

CUSTOMER REQUIREMENTS The main purpose of the Ares Work Glove is to make household improvement projects easier. To do this, we meet three important customer requirements: safety, ease of use, and efficiency. From survey data, we gathered that customers were specifically interested in safety and ease of use.8 The House of Quality (HOQ) similarly showed that safety and ease of use are two key ways to differentiate our product from the competition. As seen in OM Exhibit 3: Condensed House of Quality, we placed higher in both areas than our main competitors, Ironclad and Gemplers. The last area we meet customer requirements is on performance. Our glove makes for higher home improvement efficiency when compared to an ordinary glove. Quicker leveling, efficient nailing, and on-hand sanding allow for higher performance on any type of project. We focused on concurrent engineering to ensure that the product could meet both customers required attributes and engineering characteristics.
OM EXHIBIT 3: Condensed House of Quality

MANAGING COSTS Target Cost One goal ARES strives for is a high-quality product that will outperform its competitors. To do so we buy only the best materials possible and never substitute for cheaper alternatives. We calculated our target costs using a 50% channel margin and a 55% manufacturing margin.9 For Year 1, our
OM EXHIBIT 4: Target Cost Years 1 and 5

Retail Price Channel Margin Unit Price Gross Margin Target Cost

Year 1 $ 25.00 $ $

Year 5 $ 22.50 50% 11.25 60% 4.50

50% 12.50 $ 55% 5.63 $

target cost was $5.63, which was considerably lower than our actual COGS of $8.08.

8 9

Qualtrics. "New Product Survey McGlovin." MK Target Costing Power Point

3 Unfortunately, this target cost was unattainable because of high fixed costs in the first year as a startup company. However, due to economies of scale, increases in demand, and more efficient production, the COGS decreases to $4.47 by Year 5, below the target cost of $4.50. We are assuming a 55% gross margin by year 1 and 60% by year 5. Make-Buy Decision Make Synthetic Leather Cloth Labor Cost/Unit Total Unit Cost Fixed Startup Costs Cycle Time (per glove) Daily Production Capacity Buy Glove Price (per glove with discounts) Daily Demand The most important make-buy decision we came $ 0.40 $ 0.25 $ 1.17 $ 1.82 $ 4,000.00 180s 160 gloves across was whether to make the initial glove itself or to buy it. In the end, we decided to buy it. Our glove needs to be of high quality in order to meet customer requirements in our surveys and HOQ (House of Quality). To produce a glove of the same or higher quality as our supplier, we would have to take on more workers, time, and startup costs consisting of $ 1.60 new machines.10 The individual costs of these components can be seen in OM Exhibit 5: Make vs. Buy. Making the glove requires us to take on

178 gloves

OM EXHIBIT 5: Make vs. Buy

additional fixed assets startup costs which would increase our initial investment risk. Furthermore, the cycle time of producing these gloves would not meet our demand. This would slow our production process to a point we cannot accept. Therefore, we decided to buy the gloves in order to reach our yearly demand and to save on costs. Thus our in-house production consists of adding on the attachments with the use of an industrial sewing machine11 and Gorilla Glue.12
OM EXHIBIT 6: Supplier Map

SUPPLY CHAIN Suppliers Although we decided to outsource the actual gloves, we will add the additional components, such as the level,
10

GB6-180 Leather Sewing Machine, March. 12. 2013<http://www.alibaba.com/product gs/250790621/GB6_180_Leather_Sewing_Machine_industrial.html 11 Industrial High Speed Sewing Machine Fast Stitching Sewing Machine Alibaba, March 8, 2013. <http://www.alibaba.com/product-gs/648379387/industrial_high_speed_new_zig_zia.html> 12 Gorilla Glue Gallon Strong Gorilla Glue by the Gallon Ebay <http://compare.ebay.com/like/251236640230?var=lv&ltyp=AllFixedPriceItemTypes&var=sbar>

4 rubber padding, nail attachment, etc., in-house. The majority of our material suppliers are located in China. We chose these manufacturers because they produce the same quality materials as local manufacturers, but at a much cheaper price. Three of our five Chinese suppliers are also ISO 9001 certified for quality13, while the other two suppliers are verified by Alibaba.com, the biggest Chinese online marketplace.14 An additional benefit of our Chinese suppliers is that they are all located near one of the biggest export cities in the world, Shenzhen15. Lastly, four of our five Chinese suppliers are located in Xiamen which not only increases the efficiency of shipping, but also saves on shipping costs (see OM Exhibit 6: Supplier Map). Item #/unit Cost/piece Manufacturer Rubber 1 $0.25 World Strong Rubber Co. Nylon Cord 1 $0.04 Xiamen Xingmingfeng Textile Sandpaper 1 $0.01 Xiamen Furuisheng Abrasive Material Co. Plastics 1 $0.30 Xiamen Xin Shi Wei Precision Mould Co. Glove 1 $1.60 Lava Glove Company Mini Level 1 $0.10 Jinhua Hengda Tools Factory Header Card 1 $0.02 Foshan City Guanghong Paper Printing Co. Total $2.32
OM EXHIBIT 7: Attachment Costs

Glove Supplier The most critical part of our product is the glove. We decided to choose Lava Glove Co., Ltd. as our supplier. It is a reliable work glove supplier that has been producing high-quality work gloves for over 10 years.16 Lava Glove offers customizable gloves, which means they can produce gloves according to our specific design. This is a huge benefit because our gloves require a unique design. Additionally, Lava Glove is located in Guangxi, China, a city close to Shenzhen; this results in lower shipping costs (see OM Exhibit 6: Supplier Map). Finally, Lava Glove upgrades its management to conform to international standards of ISO9001:2008, ISO14001:2004, and SA8000:2008.17 Lava Glove Company is a great choice because it offers a high quality, customization, and lower shipping costs.

13 14

All NQA Services April 2, 2013 <http://www.nqa.com/en/atozservices/what-is-iso-9001.asp> Alibaba Home Page, April 11, 2013 http://www.alibaba.com.htm 15 Shenzhen Port, April 11, 2013 http://www.szport.net:8080/eng/Info/index.htm 16 Home Company March 5, 2013 <http://www.lava.net.cn/_d275759771.htm> 17 Home Company March 5, 2013 <http://www.lava.net.cn/_d275759771.htm>

5 Packaging We chose to outsource packaging to Foshan City Guanghong Paper Printing Company18, an experienced and dependable business that produces customizable header cards. This company is ISO-certified for quality which differentiates it from other printing companies. This supplier also offers a competitive price of $0.02 per unit for orders above 10,000 units, an excellent deal for the high quality. Furthermore, the company is located in Foshan, Guangdong which is very close to our shipping port of Shenzhen.
OM EXHIBIT 8: Packaging Supplier Map

As all of our suppliers are located in China, a big question for ARES was how to transport raw materials to our facility in the United States. Air transportation is too expensive and requires a minimum order of 100 kg, which is an order that could not be met. The biggest issue was whether to ship all of our materials from Shenzhen at once or to ship them individually according to their specific lead times. In order to ship all the materials at once, we would have to own or rent a storage facility in Shenzhen. Additionally, we would have to place orders for quantities larger than our EOQs, producing high holding costs. The option that was most efficient for both operations and costs was to ship each individual raw material in 1-cubic meter sized boxes. The company New Chain Logistics will handle our shipping for a flat rate of $50 per cubic meter box. This method is not only faster, as it ships our materials direct from Shenzhen to Chicago, but also cheaper and allows us to ship at our EOQs.19

MANUFACTURING FACILITY Facility ARES manufacturing facility will be located at 9336 South Jeffrey Avenue Chicago, Illinois.20 This location was chosen based on a center of gravity analysis as well as a few other qualitative reasons. Our center of gravity analysis (see OM Apendix 6) was calculated based on the distance from distributor warehouses. Being as close as possible to our distributors is incredibly
18 19

Company Profile Home Page, April 5, 2013 http://www.fs-gh.com.cn/indexe.asp International Shipping ServicesMarch 6, 2013 <http://www.nclogistics.biz/doce/product/default_186.html> 20 International Shipping Services March 6, 2013 <http://www.nclogistics.biz/doce/product/default_186.html>

6 advantageous because it will help us maintain our 99.9% service level. The center of gravity analysis set our ideal facility location near Kansas City, Missouri. We wanted to remain near Kansas City while also taking into account other factors such as distributor headquarters and city economics. As the headquarters for both Ace Hardware21 and True Value22 are in Chicago, coordination with these distributors will become incredibly simple in the future. Also, there are more Ace Hardware and True Value stores in Chicago than in Kansas City. Furthermore, Chicago is considered the economic hub of the Midwest, opening us up to new options as our company develops.23 Additionally, Chicago has both a higher median income and a higher number of home improvement retailers than Kansas City making it a more attractive headquarter location for our home improvement accessory company.24 Median Household Number of Ace Hardware Number of True Income Stores Value Stores $45,734.00 27 24 2 $41,999.00 5 2 0
OM EXHIBIT 9: Supplier Contacts

Chicago Kansas City Layout

We have a large facility that boasts 14,000 SF. The majority of the facility is occupied by warehouse and inventory space. The office space only takes up 17.6% of the entire facility while still allowing us the necessary space to run our operations. The office area is comprised of a break room, conference room, and main office. Our spacious conference room can be used for meetings with investors as well as with clients. As years go on, the office will be able to accommodate more desks to account for our larger staff including sales reps and account managers. The warehouse is comprised of four main areas: inventory rooms for raw materials, WIP, and finished goods, as well as a massive workspace for our assembly process. There are two possible assembly-line styles for our process: the straight-line and the U-shaped assembly.25 We chose the U-shaped assembly line for the following reasons: 1) Raw materials and finished goods inventories are located on the same side of the facility. The U-shape minimizes travel time with materials and finished goods.
21 22

Career Opportunities March 25, 2013. <http://www.acehardware.com/corp/index.jsp?page=jobs> Locations March 25, 2013. <http://truevaluecompany.com/about_true_value/locations -hq.asp> 23 Chicago and County Statistics March 29, 2013. <http://www.city-data.com/city/Chicago-Illinois.html> 24 Kansas City Statistics March 29, 2013. <http://www.city-data.com/city/Kansas-City-Missouri.html> 25 OM 13 Location and Layout Power Point

7 2) We have a large number of factory workers. The U-shape increases communication and teamwork of workers. 3) When our operations grow, there will be a limited amount of space. The U-shape occupies approximately half the space a straight-line assembly occupies. Our factory layout consists of a high level of standardization, while utilizing a large workforce that handles individual tasks. This product layout allows for a higher volume output coupled with higher utilization of labor and equipment. Higher standardization leads to labor specialization, reduced training costs and times, and lower cycle times after a few years of
OM EXHIBIT 10: Warehouse Layout

experience. As our demand increases, we will simply

enlarge our process within the same structure. By adjusting space and the number of workers at each workstation, our output will increase without the high costs of training or new equipment.26
OM EXHIBIT 11: Year 1 Management

ORGANIZATION

As shown in OM Exhibit 11, our organization in Year 1 includes three executives: CEO, CMO/CFO, and a COO/CTO, as well as a Manufacturing Representative and an Accountant. Reflected in OM Exhibit 12, by Year 5 our organization will grow to also include single-function chief officers, three Sales Representatives, one Marketing Intern, and one Finance Intern.

Chief Executive Officer

26

Boston University School of Management Operations Management , McGraw-Hill 2012 Boston

8 The CEO is the face of the company. Not only will she or he continue to find new investors but will also maintain the welfare of both the company and its employees by making strategic business decisions. All other executives will work with the CEO to shape the companys future.
OM EXHIBIT 12: Year 5 Management

Chief Marketing Officer The CMO is in charge of all marketing aspects related to the company including market research, ad campaigns, and promotions in advertising. In Year 1, the CMO will also take on the responsibilities of CFO and will therefore be in charge of the financial duties listed below.

Chief Financial Officer Beginning in Year 2, we will have distinct CFO and CMO positions. However in Year 1, our Accountant will update financial ledgers, track invoices, and track costs under the supervision of the CMO. The CFO is in charge of maintaining the financial health of the company by working with the Accountant to analyze and manage the companys finances as well as forecast and mitigate financial risks.

Chief Operations Officer The COO is responsible for ensuring that all operations run smoothly. This includes maintaining relationships with suppliers and distributors, and scheduling incoming and outgoing shipments. He or she will also oversee production in the facility by working with the Quality Inspector and factory workers to ensure that high-quality, defect-free gloves are manufactured. In Year 1, the COO will also serve as the Chief Technology Officer and will be responsible for the CTO duties listed below.

Chief Technology Officer Beginning in Year 2, the COO and CTO positions will be separate. The CTO is responsible for the company website, including updating the website, viewing online customer feedback, and recording flow of visitors. The CTO is also in charge of training executives in how to effectively use our database while also serving as IT help.

9 ASSEMBLY PROCESS As described in OM Exhibit 13, three main workstations comprise our manufacturing process: inventory and inspection, glove formation, and packaging and inspection. The workers at the glove formation station stay at one table and do not shift to other stations. These workers do not move because their cycle times are the
OM EXHIBIT 13: Assembly Process (cycle times in parentheses)

Part Inspection tasks highest and thus produce the bottleneck. The left

hand glove has twice the workers because it consists of two 60-second cycle time processes in contrast to the right hand glove which only has one. To keep idle times at a minimum, the inventory and quality workers will split their time between the inventory and packaging areas. Their cycle times are 30 seconds, or half of the glove workers; therefore, they can work at the two stations and still fulfill all duties without producing a bottleneck. Having the workers divide their time allows us to employ fewer factory workers, while still producing at capacity.

To account for left-handed consumers, 1 out of every 10 production days we will alter our process so that we can produce gloves with attachments on the right hand instead of the left. This switch will merely involve passing right-handed gloves down the left hand line and vice versa.

QUALITY The goal of ARES is to always produce high quality products that will fully satisfy customer needs. Multiple quality checks have been created

10 to ensure total quality management. First, the gloves in inventory are inspected and sized by the inventory manager to confirm they are of proper dimensions. The gloves will be compared to the appropriately-sized mannequin 27 hand (small, medium, large) to ensure the fit is snug. If there is an issue with the fit of Level Rubber Set on a level plane and examine bubble for accuracy Measure thickness, analyze inconsistencies Check for defects and deviations in thickness of more than 2mm

Plastics Nylon OM EXHIBIT 14: Quality Inspections Cord Check for fray and defects Check for inconsistencies in Sandpaper grain and fineness Glove Check for defects and tears

the glove, the inventory manager will check another glove from the same box. If the second product does not fit well, the box is moved to the scrap location. Properly-sized gloves and all other raw materials will move on to the quality inspection table. This is the second quality station where raw materials are checked by a quality inspector. In contrast to the glove formation area which produces gloves one at a time, raw materials are transferred to the material shaping table in batches of 50 units. The quality inspector checks one raw material in each batch of the 50. His inspection for each type of raw material varies as shown in OM Exhibit 14. Checking raw materials in the beginning of production will lower our internal failure costs and ensure that final products are of high quality.

After gloves are finalized, they are relocated to the last quality inspection station. At this station, each pair of gloves are inspected for defects and tested by a machine which will apply 400 lbs of pressure.28 If the glove shows any defects or weaknesses during this test, they will be disassembled and reworked from the beginning of the glove shaping area. By checking every single glove, our external failure costs will be near zero and our level of consistency will be incredibly high.

CAPACITY
27

Wholesale Hand Mannequins March 27, 2013.http://www.alibaba.com/productgs/760864948/cheap_cheap_cheap_hand_mannequin_wholesale.html 28 Testing Machine April 5, 2013. http://www.alibaba.com/productgs/325345815/WAW_Computer_control_electro_hydraulic_servo.html

11 Our capacity for Year 1 is very high due to a cycle time of 60 seconds/unit. With a work day of 8 hours and a year of 50 weeks, we are able to produce 120,000 units per year (see Appendix 10). This capacity covers our demand through Year 3 but no longer is sufficient in Years 4 and 5. To account for this increase in demand, we decrease our cycle time to 30 seconds by hiring 1 additional worker for each of the four 60 seconds tasks. Accordingly, our capacity will increase to 240,000 units per year, which means we will comfortably meet our yearly demand of 219,536 in Year 4. In Year 5, we will hire 4 more additional workers to decrease our cycle time. Because much of the work is done by hand with a high level of standardization, we expect experienced workers to become familiarized with their tasks, dropping cycle times by 25% in Year 5. This will allow for a capacity of 480,000 units per year, enough to meet our demand of 432,482 units.

DEMAND and INVENTORY Year 1 As our product is not specific to a particular season or considered dependent on similar outside influences, our demand does not greatly fluctuate over the course of Year 1. The greatest demand is at 4,504 units, which occurs in April, May, November, and December. Spring season is primetime for home improvement projects29, and November and December will spike up demand due to holiday shopping. The lowest demand is 3,200 units, which occurs in February, March, August, and September. In the case of a shortage stock or a delay in materials, we will maintain a safety stock of 2,504 units. The holding cost per unit for this stock is $4.70.30 The annual forecasted demand is 46,221 units. As our annual regular production is 60,045 units, our monthly production is 50,000 units per month. During this year, the facility will have five factory workers as full time employees. As we will be able to fulfill demand with these workers, we will not be employing part-time workers or utilizing overtime.

Year 5

29

"Warm Weather Signals Busy Home Improvement Season and "Honey Do" Lists Grow." RISMedia . N.p., 2 June 2011. Web. 6 Apr. 2013. <http://rismedia.com/2011-06-01/warm-weather-signals-busy-home-improvement-seasonand-honey-do-lists-grow/>. 30 OM 7 Inventory I Power Point

12 By Year 5, our forecasted annual demand will grow to 432,481 units. The highest monthly demand of 42,080 units, comes during April, May, November, and December. The lowest demand of 30,000 units comes during February, March, August, and September. With these demands, we will maintain 23,347 units as safety stock. This will cost us $15,716 each month with an increase to fourteen factory workers, making regular production manufacture 418,120 units at the end of the year. As this production will not meet our demand, we will be required to utilize overtime production. Overtime production is forecasted as 16,240 units, broken up as 10,000 units in January and 2,080 units in April, May, and November.

CONCLUSION Integration with Information System To manage our operations, we chose Epicor ERP, an enterprise resource planning (ERP) system that serves not only our operations needs but also finance, HR, and marketing. Key aspects of its manufacturing features include maximizing productivity in bills of material, managing capacity, managing cost and inventory, controlling quality, scheduling, and managing the warehouse and workflow. In terms of project management, the software will help optimize management activity involving billing, costing, collecting data, assuring quality, role based dashboard, and time and expenses. Additionally, Epicor will help our supply chain management remain effective, specifically in terms of inventory tracking, order entry and processing, purchasing, shipping and receiving, supplier scheduling, and supply chain planning.31

Integration with Marketing Market survey was important for us when deciding the most crucial attributes for our product. From the survey and the focus groups, we found out customers care most about safety and ease of use. Based on that, we updated our design by maintaining the same level of safety while sizing down attachments for the Handy Glove. As production continues, we will monitor the effects our marketing campaigns have on our demand and compare them to our forecast. If demand changes due to our advertising, we will adjust our production accordingly. Should customers specify a change for design, we will also adjust our design accordingly.

31

Find The Best ERP Software April 7, 2013. http://erp -software.findthebest.com/q/2/2055/What-features-doesEpicor-ERP-by-Epicor-Software-enterprise-resource-planning-ERP-software-offer

13

Integration with Finance Financial Implications ARES strives to produce the highest quality glove while monitoring its costs effectively. We do this by minimizing costs, ordering inventories efficiently, outsourcing expensive materials, and operating with low fixed assets. Keeping holding, shipping, and ordering costs at a minimum allow ARES to recognize greater margins. Holding cost was 30% of our price and order costs were set at a fixed $5.00.32 This low order cost is due to streamlined purchasing primarily through Alibaba.com. Our shipping costs were also kept low by ordering materials individually by sea at our calculated EOQs. Additionally, ordering at EOQs allows ARES to more efficiently regulate its inventory costs.

ARES outsources for most our raw materials rather than producing in house. This allows us to require less fixed assets which would otherwise drive up our necessary initial investment. Due to the high number of direct laborers, our high direct labor in COGS prevents our company from producing at a large gross margin. This high direct labor is necessary to ensure the level of quality that our customers will come to respect us for.

32

OM 7 Inventory I Power Point

13

MARKETING PLAN

CORE B2 TEAM 4
Diya SenGupta, Jessica Cao, Andrew Ju, Luke Shapiro, William Byun, Michael Buckley, Natalie Meyer, Dvisha Patel, Dana Butterman

14 OBJECTIVES

Objective #1 Title: Create a marketing campaign that will raise awareness by 32.45% in year 5. Description: Throughout the first five years, we want to raise awareness to 32.45%. We have decided to spend an abundance on marketing, accepting net profit losses in our first 4 years to generate long-term awareness, thus creating long-term revenues. This spending continuously increases the number of ads we put into the magazine Family Handy Man, which in year 5 alone will raise 8.79% awareness. Furthermore, we plan to attend trade fairs to exhibit our product throughout major cities in the United States. These will increase awareness in year 5 by 5.64%. Also, we will display our product in a creative way on billboards and buses in metropolitan areas in the United States. Most importantly, we plan to have a strong and creative advertising strategy to capture our target market of 20 million homeowners.

Objective #2: Title: Reach big box stores and mass merchandisers by year 4. Description: Our goal throughout years 1 to 4 is to earn enough revenue and generate enough buzz in order to place our product in big box stores such as Home Depot and Lowes and in mass merchandisers such as Sears, K-Mart and Walmart. We plan to achieve this by spending a generous amount on marketing in the first three years. The money we are spending on our marketing strategy during years 1-3 will raise awareness, and therefore enough revenue, for our product to earn a place in big box stores and mass merchandisers. At the end of year 3, our revenue will increase to $1,496,493. This level of revenue will meet the requirement to be placed in big box stores and mass merchandisers.

15 Objective #3: Title: Differentiate ourselves from our competitors. Description: We plan to differentiate ourselves from our competitors, including Ironclad Performance Wear, by selling at a lower price and advertising the many unique features that our glove offers. We plan to do this by including key benefits in our advertisements. For example, in our billboard ad we show the 3 main attachments of our gloves (See MK Appendix 13: Billboard Ad). This includes the level, the sand paper, and the unique nail assistant. These three accessories can only be found on the ARES Work Glove and strive to raise awareness in our target market. In addition, our header-card packaging allows our customer to immediately see how to use the glove and why we stand apart from other glove manufacturers. Overall, our entire marketing campaign is geared towards advertising the benefits and the differences between our product and competitors.

SEGMENTATION Our primary target market is Handy Homeowners. This target market consists of male and female homeowners between the ages of 30 and 55. We are targeting homeowners within this age range who perform Do It Yourself (DIY) tasks. The size of this target market is 20 million households. 33

It took many trials to settle on this group as our final target market. Initially, we based our segmentation tree (See MK Appendix 1) on income, targeting lower-income households only. We believed they would be more inclined to perform DIY projects around the house, while higher-income people would be more likely to hire contractors. Our Qualtrics survey analysis along with Mintel research showed us however, that the purchase intent does not differ between the income groups34. We also excluded females from our target market because we assumed that males were far more interested in DIY projects. Again, our surveys gave us different results. Although there is still a higher percentage of males who conduct DIY projects35, there are plenty of females who are also very interested in home improvement tasks. During our focus groups,
33
34

US Census Bureau March 12th, 2013 http://www.census.gov

Qualtrics Survey April 14 , 2013 http://www.qualtrics.com
th

35

Mintel March 27 , 2013 http://www.mintel.com/

th

16 where we talked to both men and women of multiple age groups, we came to the conclusion that the majority of the women were interested in purchasing our product (See MK Appendix 18,19). Thus, we decided to include males and females.36

The next target market segmentation we created consisted of homeowners ages 30-55 and renters 25-55. At first, we thought that homeowners and renters were equally strong target markets. We chose a lower age for the renters category since far more young people are renters. This target market consisted of 35 million households.

After reviewing our Qualtrics surveys again, we decided to adjust our target market one last time by eliminating renters from our target market. We found that renters performed less DIY projects around the house per year.37 Qualtrics showed that homeowners do more handy work throughout the year, as shown in MK Exhibit 1: Homeowners vs. Renter Handy work. Mintel research supported
MK Exhibit 1: Homeowners vs. Renter Handy Work (from Mintel)

this conclusion, showing that 60% of all DIYers were homeowners.38

Furthermore, the homeowners in our focus groups were willing to pay more and were more likely to purchase ARES Work Glove than the renters (See Appendix 18, 19). Overall we chose to only focus on homeowners because they were more inclined to buy our product and recorded a higher purchase intent than renters39. By focusing solely on homeowners, we are able to increase our awareness for our target market, and therefore achieve higher revenues.

36 37

Mintel March 27th, 2013 Qualtrics Survey April 3rd, 2013 http://www.qualtrics.com/ 38 Mintel, March 27th, 2013 39 Qualtrics Survey, April 3rd

17

INTEGRATING MARKETING COMMUNICATION We developed an integrated marketing communication strategy that would best reach our target market and capture their attention. We plan to use several outlets to inform our end users of the product, its functions and features, and why our glove will make home improvement tasks easier, safer, and more efficient. Throughout all five years, we will communicate with our customers through a mix of push and pull strategies. As demand and sales rise, we will increase our budget for pull advertising while keeping the push budget steady through all five years. It is important for a start up company to build a certain reputation among its users and the industry. This is best done through effective pull strategies such as traditional advertisements in magazines, out-of-thebox strategies used online, billboards and buses, and attending trade fairs. These offer great opportunities for our target market to become aware of our product, thus increasing demand year by year. We chose to be informative rather than emotional in terms of our ads. All designs will be simple and straight-forward, just like the glove itself.

PULL Magazine MK Exhibit 2: Magazine Cost and Awareness Years 1-5 Year 1 Year 2 Year 3 Year 4 Year 5 Total Cost $204,000 $292,000 $365,000 $511,000 $584,000 CPM $103.03 $103.03 $88.48 $88.48 $88.48 Awareness 3.14% 4.94% 6.18% 8.65% 9.88%

For all five years, we will advertise in only one magazine. After thorough research on our target market, we decided to choose Family Handyman. This magazines target audience goes hand in hand with the description of our target market. Their average reader is an over 30-year-old married male homeowner.40 Even though we are targeting both men and women, Mintel research shows that 68% of men are DIYers who complete four large home improvements per year on average, while 53% of females are DIYers who perform an average of two.41
40 41

Family Handyman March 27th, http://www.familyhandyman.com/ Mintel, March 27th 2013

18 Therefore, it makes sense for us to advertise in this magazine because Family Handyman is a family-oriented magazine with a circulation rate of 1,100,00042. As 90% of its readers fall within our target market, this allows for high percentages of awareness. In year 1, our budget only allows for half-page ads four times a year, which is the exact number of views needed to make an impression. In year 2, we will run full-page advertisements four times a year. As our demand grows, so will our marketing budget. Therefore, we will steadily increase the number of advertisements per year in Family Handyman. Even though we considered other magazines such as Mens Journal, we came to the conclusion that it will be far more efficient to place ads in only Family Handyman for the first five years since it will increase awareness drastically from year 1(3.14%) to year 5 (9.88%). The increase in cost from $204,000 to $584,000 is worth the demand we will get in return. MK Exhibit 2: Magazine Cost and Awareness Years 1-5 shows the summary of total cost, CPM, and awareness for magazine ads in every year.

Online/Blog We are choosing to spend more than 17.5% of our total marketing costs for year 1 on online pull marketing strategies and over 20% of annual budgets for years 2-5. Through our survey responses, we found that our target market relies heavily on finding advertisements on home improvement blogs, websites, and DIY Google searches.43 We also learned through Mintel that mostly females expect to see our advertisements on different forums and banners.44 Furthermore, the majority of the people in our focus groups said that they spend a large amount of time online and would be likely to search for our product (see Appendix 18, 19). We will therefore rely heavily on increasing awareness through online ads and expect a higher awareness generation per dollar spent than other industries. Our budget will rise from $80,000 to $250,000 in the first five years as we have found this to be an effective way to reach our audience. Awareness will also increase steadily over the first years from 2% to 4% to 5% to 7% to 9%.

42 43

MRI+ March 15th, 2013, http://mriplus.com/ Qualtrics Survey, April 1st 2013 44 Mintel, April 1st 2013

19

Trade Fair The Massachusetts Home and Garden Show is one of the biggest trade fairs in the United States45. We can set up our own booth and demonstrate our product to consumers who fall exactly within our target market. We will have a large banner promoting the three main features of the ARES Work Glove to capture the consumers attention (see Appendix 15). We will also have the manufacturers representative demonstrate the many uses of the glove and offer free giveaways, such as key chains with small ARES Work Gloves attached to them.

The Scottsdale Super Expo in Arizona is another trade fair where we will present our glove during the first years. It is the largest expo in Arizona, and includes many sub-areas, one of which being Home and Building which is the expo we will attend.46 As our revenue grows over the years, we will be able to increase our budget for this expo. Most consumers visiting are right within our target market, allowing awareness among customers to increase. The Home Show in Chicago is known amongst many DIY couples within our target market.47 Our budget for this trade fair will be lower than that of other fairs because we are located in Chicago and will not have to include traveling and hotel room costs. Furthermore in year 1, we will have product demonstrations in Los Angeles and San Diego. Throughout the years, we will have product demonstrations in San Francisco, New York, and Houston. These will be fun events where we will have consumers race to complete small DIY projects. We will have some participants use nails and a hammer while others use our glove and a hammer. This will give us the opportunity to prove to any skeptics that our glove truly is a much more efficient and safe way to perform tasks around the house. We will hand out key chains with a small ARES Work Glove on them as well as T-Shirts with the slogan: ARES Work Glove Improving Home Improvement to anyone willing to take the DIY test. This will be an active way for consumers to get to know our product and experience the fun that comes along with it.

45 46

Mass Home Show, March 27th, http://www.westernmasshomeshow.com Scottsdale Super Expo, March 27th, http://exposaz.com/scottsdale-super-expo/home-art-garden-show 47 Chicago Home Show, March 27th, http://www.chicagohomeshow.net

20

Billboards and Buses Our billboards and buses expenditures during all five years remain the same at $60,720, creating 1.82% awareness. We will be campaigning with this pull strategy in the major cities of Chicago, Houston, LA, San Diego, New York City, and San Francisco. We conducted research through Mintel and found that there is no remarkable difference between people in urban and suburban areas doing DIY projects.48 Therefore, it is more effective for us to advertise in urban areas where there is a denser population. Additionally, most suburban homeowners are employed in urban areas49; advertising in urban areas reaches and creates awareness among both urban and suburban homeowners. Billboards and Buses advertisement are depicted in (see MK Appendix 13 and 15).

POP We expect to set up point of purchase displays in independent hardware stores. Our marketing budget allows us to spend $20,000 on POP. This generous amount will give us the opportunity to display our product in a large amount of stores. We will invest in standing POP displays that will be placed strategically near other gloves. Our display will automatically draw attention away from our competitors and cause the consumers to focus on our product. This will increase both awareness and sales in independent stores. The design is shown in (see MK Appendix 14).

Public Relations There are many home improvement magazines and blogs out there, therefore it is crucial for us to gain free coverage for our glove in those outlets. In order to be able to be placed and promoted in our chosen magazines and blogs, we will create sustainable relationships with editors and writers from the start. We will invite them to trade fairs, expos, and product demonstrations. We plan to send them product kits that include t-shirts with the slogan: Improving Home Improvement, and key chains with miniature ARES Work Gloves (see MK Exhibit 3, page 21) and even a pair of our gloves. Through this strategy, we will make a positive impression without having to ask them to reference us in their articles. Our budget of $20,000 allows us to send

48 49

Mintel, April 2nd 2013 Mintel, April 2nd, 2013

21 giveaways and information kits about our glove to writers in order to motivate them to positively mention us. This effort will provide writers with an incentive to promote us, which will in turn raise 3% awareness every year. We will send these kits to magazines like Better Homes and Gardens, a DIY oriented magazine with 7,600,000 ratebase,50 as well as Mens Journal, Mens Fitness, and Mens Health, all magazines that will target our male consumers with ratebases from 550,000 to 1,800,00051. Lastly, we plan on being promoted in blogs such as Remodelaholic, which was has a 15,000 feed subscribers52 and Charles and Hudson, a DIY blog that targets both men and women53

MK Exhibit 3: Key chain give-away

PUSH Trade shows

Month Trade shows Build Expo Atlanta Build Expo Texas Build Expo NY Builder Trade Magazine Total Push Exhibit 4: MK Year 1 Push Strategy 1 2 3 4 5 6 7 8 9 10 11 12 $21,000.00

In years 1 through 5, we will be attending a trade shows in 3 cities across the

$30,000.00 $51,000.00

United States: Texas in March,

Atlanta in April, and New York in May. This trade show is called the Build Expo Trade show and appears in all these cities.54 At the Build Expo Trade show, we will have a booth to exhibit our product to potential clients. The total cost of these trade shows is $21,000 per year or $7,000 for each trade show. The cost includes renting a booth, traveling, booking hotel rooms, and decorating our booth.55 Attending these trade shows will allow us to build a name for ARES

50 51

MRI+ http://mriplus.com, March 27th 2013 MRI+, March 27th 2013 52 MRI+ April 2nd 2013 53 Charles and Hudson April 2nd 2013, http://charlesandhudson.com 54 Build Expo, March 27th 2013, Build Expo. http://buildexpousa.com/index.html 55 Boston University School of Management. "IMC (Awareness) Tutorial."

22 among the retailers who will be carrying our product, as well as a way for our company to create face-to-face networking within our industry.

Trade Magazine We plan to be featured in the trade magazine Builder Trader Magazine.56 This will occur twice a year (March and September) for our first 5 years. This magazine will be a great way to reach potential buyers who are interested in DIY projects. The total cost of being in this trade magazine is $30,000 each year.

Word of Mouth We calculated word of mouth by classifying our product as a semi-public product. This means that 50% of users will generate buzz for our product. For each single user, there will be 3 people who are made aware of the product. In year 1, word of mouth is projected to be 0%. In year 2, word of mouth will increase to .33%, and will continue to increase in the years to follow as: year 3 (.49%), year 4 (.74%), and year 5 (1.10%) as sales increase.

MEASURING EFFECTIVENESS One way we will measure the effectiveness of our marketing campaigns is through our own online sales. When ordering the product through Amazon.com, a customer will be asked Where did you hear about the ARES Work Glove? before being able to click purchase. We will offer the multiple-choice options of: Family Handy Man Magazine, online blogs and trading websites, billboards and buses, trade fairs/trade shows, or word of mouth. This is a free and simple way for us to track the most effective marketing strategy, which will help us determine in the future where our advertising money is best spent. We will also use Google Analytics, a free tool that tracks the number of people on our website, what they are viewing, and their click through rate. Another way we will measure our effectiveness is at trade shows. At the trade shows, we will have a laptop set up and will ask the visitors at our exhibit to answer the survey question: Have you heard of this product before and if so, from where?. An incentive to fill out these surveys will be our free giveaways a keychain with a picture of our glove on it (see MK Exhibits 3) and a T-shirt with the slogan ARES Work Glove - Improving Home Improvement.
56

Builderonline, March 27th 2013, http://www.builderonline.com

23 This is also another simple way to find out more information on the success of our marketing strategies.

CREATIVE Logo The ARES Work Glove logo is an image of our glove holding a stone sign that says ARES Work Glove. This ad demonstrates the power of the glove as it cracks the stone due to its brute strength. It implies that the glove is so powerful that there isnt a task it cannot perform (MK Exhibit 5) Slogan: Improving Home Improvement The slogan for the ARES Work Glove is Improving Home Improvement. We chose this because the main benefit of our product is that it makes all home improvement tasks quicker, safer, and more efficient. Thus, improving home improvement. This slogan is featured on all of our ads, which allows our target market to associate it with our brand MK Exhibit 5: Logo Billboards and Buses Our ad for billboards and buses is an image showing the 3 main functions of our glove: nailing, leveling, and sanding (see MK Appendix 13 and 15). This is a simple and informative way to get across the features of our glove. Since this ad is going to be viewed when people are on the move, it is crucial that our customers can see and comprehend the glove, its functions, and the company quickly. wherever they see it.

Magazine We are advertising in only one magazine for the next five years. Our ad is an image of a couple, in their mid-30s, standing against a white wall while hanging up their first family portrait with the help of the ARES Work Glove (see MK Appendix 17). This ad will be in the Family

24 Handyman magazine, whose main audience is married homeowners over the age of 30. This ad design will be most effective for this magazines audience because Mintel research shows that households with children are more likely to do DIY projects57. This is a family-oriented advertising method for a family-oriented audience. We are not only capturing our target markets attention but also that of the magazines. This ad shows how the ARES Work Glove can be used by men and women performing home improvement tasks around their home.

PACKAGING Our packaging for the ARES Work Glove shows how we differentiate ourselves from our competitors. The packaging is a header card with the physical gloves dangling such that potential consumers can try the product on. On the front of the packaging, there is an image, similar to our billboard ad, which illustrates the 3 main tasks the glove can perform, which are nailing, leveling, and sanding (see MK Appendix 16). These benefits will capture our target markets attention immediately when they walk past it. On the backside of the packaging, there is a deeper explanation of the different features of the glove.

CHANNELS AND PRICING Distribution Schedule Retail For the first two years, our product will be sold solely in independent hardware stores such as Back Bay Hardware and Seaport Hardware in Boston, but no other retailers. Our revenue and demand at this point will not be high enough for us to afford placement in bigger chain stores like Ace or True Value, or the big box stores such as Home Depot and Lowes. Nevertheless, focusing on these independent hardware stores will allow us to utilize word of mouth to become a popular product among our target market as well as allow chain stores to become familiar with our brand name. We plan to develop a certain reputation amongst this target market before we progress into larger retailers. By year 3, we will have built a big enough name for ourselves, through our unique marketing campaign and by networking at trade fairs and expos, to allow us to expand into the bigger hardware chain store Do it Best. For years 4 and 5, we feel confident that our demand and reputation will be high enough to earn a space in the
57

Mintel, March 27th 2013

25 following two big box stores: Home Depot and Lowes and in mass merchandisers such as KMart, Walmart, and Sears. We are realistically accounting for a decrease in our products presence in independent hardware stores once we move into the big retailers.

Online For our first five years, we will sell our product through Amazon. We considered selling the glove on our own website; however, we have found that with a startup company many customers would not feel comfortable buying directly from us because they are unfamiliar with the brand. Since Amazon is one of the most trusted online retailers, this assures consumers their credit card information is safe.

Pricing In the first two years, our suggested retail price for independent stores and online retailers is $25. This number stems directly from our target markets purchase intent and willingness to pay, adjusted to our costs. In year 3, we will suggest a higher retail
MK Exhibit 6: Pricing

price of $26 to independent stores and online retailers since demand will be increasing significantly and the purchasing power of the dollar will decrease due to inflation. Our manufacturers selling price will increase as well, as seen in MK Exhibit 6: Pricing. Since we will be new to Do It Best and will only be selling a small percentage of our products in those stores, our suggested retail price will be $21.00 with a manufacturers selling price of $11.55. This

26 selling price will increase our chances of being accepted into all stores in which we hope to gain entry. Retail and manufacturers selling price for independent, online, and hardware chain stores remains the same in year 4 as it was in year 3. However, we are now also selling our products in big box stores and mass merchandisers, with a suggested retail selling price of $19.99 for both types of stores. Since they will have large order quantities and a retail margin of 40%, we will be able to sell to those stores at a manufacturers selling price of $11.99. Based on our surveys, a $19.99 retail price will slightly increase our target markets purchase intent. This in in turn will increase our chances of having successful sales in these big retailers and therefore be able to continue selling our product in these locations in future years. Come year 5, we will most likely decrease the number of products we sell to independent stores and online retailers. We anticipate that they will be ordering lower quantities due to limited possibilities created when competing with big names in the market. Smaller orders and inflation will lead to a higher suggested selling price of $26.50 for both independent stores and online, and a higher manufacturers selling price. The prices for the hardware chain stores, big box stores, and mass merchandisers remain the same as the previous year. MK Exhibit 6: Pricing breaks down each years manufacturer selling price, margin, and suggested selling price for every retailer. Discounts Our company has decided to not include any discounts throughout the first 5 years. Our marketing campaign is strong enough to make customers aware of our product without the use of any extra discounts. We allocated a large marketing budget towards a strong advertising campaign to create customers awareness of our valuable product instead of having to offer discounts as incentives to buy the product. Our advertising campaign is aimed towards raising the need and demand for the gloves.

Purchase Intent We gathered data from our Qualtrics survey to calculate purchase intent. When we surveyed potential consumers, we used $10 price increment ranges on a scaled question to gather information about what price buyers would pay. Increments ranged from $0-9.99, $10-19.99 and so forth. We discounted our responses and assumed that 80% definitely buy responses, and

27 30% of probably buy responses would actually buy the product. We assumed consumers purchase intents reflected the price at the midpoint of each rangethat they perceived $20-20.99 to be $25. Thus when weighing purchase intent for our respective retail prices, we calculated a weighted average of intent based on the midpoints directly above and below the price. We developed this formula so there was no drastic difference in purchase intent between the price of $19.99 and $20.00 (since they fell into different ranges.)

All Commodity Volume (ACV) MK Exhibit 7: ACV Breakdown Independent Online Hardware Chain Mass Merchandisers Big Box Total Year 1 2.16% 12.00% Year 2 3.80% 12.00% Year 3 5.05% 12.00% 1.20% Year 4 4.87% 12.00% 2.60% 1.68% 8.74% 29.89% Year 5 3.79% 12.00% 4.85% 6.60% 25.42% 52.66%

14.16%

15.80%

18.25%

To calculate ACV, we broke down the $289 billion home improvement industry into retail categories and their stores sales shares. Online stores account for 12% of industry sales. We expect to sell online in all years. Independent stores make up 9% of home improvement sales. In all years, we expect to reach out to 80% of independents that do not yet carry our product. We estimate that 30% of the stores we reach out to will accept our product. Chain stores account for 8% of industry sales with top three stores broken down as: Ace Hardware with 47% of chain sales, Do It Best with 30%, and True Value with 23%. We expect for our product to be carried by 50% of chain stores in the first year we enter them, and carried by 70% in subsequent years. We enter the middle of the three chains, Do It Best, in year 3, True Value in year 4, and Ace in year 5. In year 4, we enter both big box and mass merchandisers. Because these large retailers accept our products, independent stores that carry our product will begin to decline by a factor directly related to our ACV produced by mass merchants and big box stores. These mega stores will carry our product in 40% of their stores in the first year they accept us and 60% in subsequent years. Mass merchandisers account for 15% of industry sales and 68% of that is from Walmart, 28% from Sears and K-Mart, and 4% from Target. We enter Sears and K-Mart in year 4, and Walmart in year 5. Big box stores dominate our industry, contributing 56% of

28 industry sales. The two major players, Home Depot and Lowes, comprise 94% of the big box categories, giving them industry ACVs of 30.8% and 21.8% respectively. We enter Lowes in year 4 and Home Depot in year 5. Because big box stores own such a large industry sales share, our ACV will spike upwards in years 4 and 5. MK Exhibit 7: ACV Breakdown shows the breakdown in ACV for all five years.

Channel Conflict One conflict we are likely to encounter is that independent hardware stores may be less inclined to sell our product once we move into big box and mass merchandisers. This is most likely because they do not have the means to compete with the driving forces of the industry. We will try to prevent independent stores form ordering too small of quantities by having a strong advertising campaign that will reassure not only customers but also retailers, that the ARES Work Glove is worthwhile and profitable for the long haul. This will give the independent stores the incentive to continue selling our product. If necessary, by year 5 we will have a marketing budget that will allow us to include discounts and promotions for these stores. To channel this conflict we would consider offering quantity discounts for large purchases. Nevertheless, we expect independent acceptance to decline as we enter big box and mass merchandisers.

Sales Force For years 1 and 2, we will only have one manufacturing representative who will be responsible for making pitches to independent stores. This representative will be under contract for the first five years. The representative will earn a base salary of $30,000 plus 10% commission on independent stores sales for year 1. For the following years, the representative will earn a 3% increase every year on the base salary. The sales commission will be $8,813.25 in year 1 and $21,619.32 in year 2. Since we will be placing our products in a hardware chain store in year 3, we will add a sales representative who will be in charge of Ace, True Value and Do It Best. The sales representative will have a set base salary $50,000. In years 4 and 5, our products will be placed in big box stores and mass merchandisers. We will add another two sales representatives who will be responsible for those store categories. During year 3, the manufacturing representative will again earn the base salary plus 10% of independent stores sales commission with another 3% increase in base salary. The sales representative for hardware chain stores will

29 earn the $50,000 base salary plus a 3% increase from last year, making a total $54,652. The two new sales representatives will earn the $50,000 base salary. Manufacturing Representative Year 1 Base Salary $30,000 Sales Commission $8,813 Total Salary $38,813 Year 2 $31,518 $21,619 $53,137 Year 3 $33,113 $34,796 $67,909 Year 4 $34,788 $46,536 $81,324 Year 5 $36,549 $41,208 $77,757

MK Exhibit 8: Manufacturing Representative Salary

For year 5, the salary pattern remains the same for the manufacturing rep as well as the three sales representatives, all of whom will be earning a 3% increase in salary from the previous year. All base salaries are adjusted for inflation. The increasing salaries, as well as the commission for the manufacturing rep, will give our representatives an incentive to build sustainable relationships with our clients and to continue to work for the company. We decided to break the representatives up by type of store so that each employee can become experts in their specific field and on how to sell our products to prospective clients. Salaries Sales Rep (Chains) Sales Rep (Mass Merchant) Sales Rep (Big Box) Year 3 Year 4 Year 5 $52,020 $54,652 $57,418 $53,060 $55,745 $53,060 $55,745

MK Exhibit 9: Sales Representative Salary Sales Volume In years 1-3, online sales are our largest contributor to revenue. However, there will be a constant decrease in online sales from 84.75% in year 1 down to 22.79% in year 5. This is likely caused by steadily increasing our sales in retailers, causing our customers to purchase the gloves in stores more often than online. In year 3, we will move into hardware chain stores. Up until year 5, hardware chain store sales will remain below 10% because we want to focus on increasing our quantities sold to big box stores and mass merchandisers in years 4 and 5. Research conducted through Mintel shows that big box stores hold 56% of the market share with

30 mass merchandisers as runner-up with 15% of market share. Directly correlated to this are our results found through the survey question: Where would you expect to find our product?58. We found that 52% answered with big box, which is why we anticipate big box stores to account for 48.28% of our sales. This assumption goes hand in hand with our expectation of being accepted into 60% of both big box and mass merchandiser stores by year 5, we assume this is why mass merchandisers will be responsible for 12.53% of our sales. Year Year Year 1 2 3 7,049 17,297 26,768 39,172 54,593 63,616 6,365 Year 4 35,806 88,144 19,100 12,338 Year 5 MK Exhibit 10: Sales 31,095 98,563 39,832 54,190 Breakdown in units

Independent Online Hardware Chain Stores Mass Merchandiser Big Box Total

64,170 208,802 46,221 71,890 96,740 219,536 432,482 Year 3 $401,020 $953,068 $953,068 $0 $0 $1,449,395 Year 4 Year 5 $487,195 $398,507 $680,885 $1,262,845 $259,905 $510,190 $167,939 $167,939 $873,280 $2,675,547 $2,469,203 $5,015,027

Year 1 Year 2 Independent $102,567 $257,495 Online $569,817 $812,801 Hardware Chains $0 $0 Mass Merchandisers $0 $0 Big Box $0 $0 Total $672,384 $1,070,297 MK Exhibit 11: Sales Breakdown in Dollars

Independent Online Hard ware Chains Mass Merchandiser Big Box

Year 1 Year 2 Year 3 Year 4 15.25% 24.06% 27.67% 16.31% 84.75% 75.75% 65.76% 40.15% 6.58% 8.70% 5.62% 29.23%

Year 5 7.19% 22.79% 9.21% 12.53% 48.28%

MK Exhibit 12: Sales Breakdown in Percentage

58 Qualtrics Survey April 2nd 2013

31
Home Depot/Lowes/Mena Home rd's Depot/Lowe Walmart/Target/Se s/Menard's, ars Year 5, Home Walmart/Ta Ace/True 2763642.83 Ace/True Depot/Lowe rget/Sears, Value/DoitBest Walmart/Ta 8 5, Value/DoitB Ace/True Ace/True s/Menard's, Year Home rget/Sears, Walmart/Ta est, Year 5, Value/DoitB Value/DoitB Ace/True Home Year 4, 173850.063 Online, Online Depot/Lowe Online, Online, Walmart/Ta Year 4, 526987.904 rget/Sears, Ace/True Home est, Year 3, Online, Independen Online, Independen Independen Independen Independen Depot/Lowe Value/DoitB 904020.328 est, Year 4, 2 5, Year Walmart/Ta rget/Sears, s/Menard's, Year3, 3,0 173850.063 Year 4, Year Depot/Lowe Value/DoitB 4 5, 98403.7403 Year 2, t, Year Year 1, 1, t, Year 2, t, Year 3, t, Year 4, t, Year est, s/Menard's, Year 2, 269053.669 4 1304425.50 Year 3, 0 704852.417 rget/Sears, Year 2, 0 984037.403 2 est, s/Menard's, Year 1, 9 837902.406 Year 0 2, 0 414051.450 110539.017 614105.654 504344.260 411628.791 2 6 Year 1, 0 265447.482 9 5 Year 0 4 9 1, 0 3 4 8 8

MK Exhibit 13: Sales Breakdown by retailer SALES PROJECTIONS

The sales projections for all five years were found using the BASES model (see MK Appendix 9). We used our target market number of 20 million and found the purchase intent by analyzing our surveys. For years 1 and 2 we give our retailers a suggested selling price of $25. We used our survey answers to find which consumers clicked definitely buy and which consumers clicked probably buy at that selling price. We then assumed that 80% of the definitely buys and 30% of the probably buys would actually purchase our product59, giving us the weighted average adjusted purchase intent of 12.39%. The weighted average is found by multiplying the adjusted purchase intent at the selling price for a certain retailer by the retail weight of that retailer and adding them all together. The weighted average adjusted purchase intent changes for year 3 because the selling prices for independent stores and online increase to $26, decreasing purchase intent, while the selling price for hardware chain stores is $21, increasing purchase intent. Again, we must assume 30% of the probably buys and 80% of the definitely buys will actually buy the product. Once that number has been adjusted, we can again multiply the purchase intent for every retailer by its retail weight and add them all together. This gives us weighted average adjusted purchase intent of 12.13% for year 3. These calculations were used for all five years. Furthermore, awareness was found through our integrated marketing communication strategy, where we analyzed how much and what kind of advertising was needed to reach a certain percentage of awareness. ACV was
59

Boston University School of Management: Lecture Forecasting Demand

32 found and explained on page 27. For each year we added up the calculated ACV for each individual retailer to find our total ACV for that year. We do not expect competition to come in until year 5, since it will take us 5 years to breakeven. Thus we do not anticipate competition to take much of our sales in their first year. We therefore estimate a competition adjusted sales reduction of 20% in year 5, and 0% up until year 5. Lastly, weighted manufacturers selling price was calculated by multiplying manufacturers selling price for every store by its retail weight. These steps give us an accurate overview of what our base case sales will look like. In Exhibit 14 there is an overview of our increase in sales every year. MK Exhibit 14: Sales Projections years 1 through 5
Sales Projections years 1 through 5 Series1, 5, $5,724,119.07

Series1, 4, $3,093,054.49 Series1, 3, Series1, 2, $1,496,492.59 $1,103,349.89

Series1, 1, $724,644.67

CONCLUSION We are confident that our marketing strategy is strong enough to reach either the base case or the optimistic case sales numbers. The way we target our audience and capture their attention through unique advertising will not only raise awareness throughout our target market but also increase demand dramatically throughout all five years making for a successful company.

33

INFORMATION SYSTEMS PLAN

CORE B2 TEAM 4 Michael Buckley, Dana Butterman, William Byun, Jessica Cao, Andrew Ju, Natalie Meyer, Dvisha Patel, Diya SenGupta, Luke Shapiro

33 IS OVERVIEW AND STRATEGY ARES Work Gloves information system strategy is to utilize our resources to foster a strong relationship with our consumer, use supply chain management to optimize our capacity, and coordinate our business functions. The ARES Work Glove is a purple ocean product.60 There is already market demand for safe work gloves, but our product creates a new demand in the market for home-improvement accessories with added safety features. We expect our product to follow a long tail distribution for the first two years.61 As both awareness and sales volume increase, we will move away from a long tail distribution, and market towards a larger audience. Once there is awareness of our product in the market, we expect an increasing number of households to buy the ARES Work Glove. Our product is a one-time purchase item that a household will use for years on end. Our website is focused on the products functions, benefits, and innovative uses. We anticipate that our consumer will visit our website when they wish to purchase the product or when they have questions about product usage. Our website will have a blog forum to keep customers engaged and tapped into the home-improvement enthusiast network, but our primary focus is on the details of the product itself.62 Although it will take time to gain traction in the market, our information systems sector must be able to handle a high operational capacity and correspond with consumers in an online setting to get feedback on our product.

WEBSITE DESIGN The ARES Work Gloves target online audience is currently surfing on home-improvement websites such as diynetwork.com, Lowes.com, and bobvila.com when they are looking for tips on the best home-improvement tactics.63 From our focus groups, we found that our target consumer is interested in efficiency, safety, and price. Our website speaks to the interests and concerns of our consumer with a simple, clear presentation of the information. The graphics on our website are focused directly on our product (see IS Appendix 7).

60
61

Allen, J.W. "IS 3 Competitive Strategy." IS 323. Boston University SMG. Boston, MA. Jan 23, 2013. "IS 3 Competitive Strategy." 62 "Marketing to a Middle Aged Man, What to Consider. http://www.businessknowledgesource.com/marketing/marketing_to_a_middle_aged_man_what_to_consider_02572 7.html 63 Wallender, Lee. The Top 6 Home Improvement Sites September 17, 2009. http://homerenovations.about.com/b/2009/09/17/the-top-6-home-improvement-sites.htm

34 The purpose of our website is to generate sales, receive feedback on our product, and serve as learning and buying tools for our customers. For our suppliers and stakeholders, the website serves to legitimize our product and serve as a platform to create opportunities.

Unique elements of our website include a blog forum, contact page, product review section, and FAQ section. On our blog, we will post innovative ways to use our product, promote trade-shows we are attending, and quote mentions or reviews of our product in the press. Our contact us page has information on our founders. Our product section contains pictures of the glove, connects to our selling page on Amazon and a product review section. The product review section allows us to receive feedback on our product and make suggested changes to the product design if needed. Our comparable competition is Ironclad, a company that specializes in work gloves.64 The Ironclad website is a platform that sells work gloves of all kinds, promotes events, sells Ironclad t-shirts and caps, and shows behind the scenes YouTube videos. Ironclad is a much bigger company and markets beyond the DIY home-improvement sector. We referenced their website while designing ours, but left out the industrial feel. Our target market wants a simple, effective glove at a great price point. Therefore, we took a relatively simple market approach.

We have laid out four goals for our website that are focused on sales and impressions. Our first goal is to receive feedback from our customers on our website. We aim to receive one comment per week on our product review section. Our second goal is to achieve a 25% click through rate from our banner advertisements on Google. We want our website to be a strong channel for consumer purchases, and thus our third goal is to have a 30% ratio of sales to impressions per month. Lastly, we would like to see a visitor conversion rate of 30% in year one. We will measure the conversion rate by how many visitors click on the purchase page on amazon versus our total web page visitors.

ARES Work Glove URL: http://senguptadiya.wix.com/coreb2team4

64

Ironclad Performance Wear. Home. http://ironclad.com/

35

SEARCH ENGINE OPTIMIZATION Our search engine optimization (SEO) has an on-site strategy and an off-site strategy. The main goal of our on-site SEO strategy is to generate strong content about the product and the activity within the home-improvement accessory industry. As our second strategy element, images of our product will be displayed to link searches back to our web page. Lastly, to increase our presence on search engine websites, we are using keywords and tags such as: work glove, glove, DIY, home improvement, nails, and hardware. This will link potential consumers to our site and help foster sales.

Our off-site SEO strategy is to use social media to connect with customers and promote our product. We will create viral videos centering around our product to increase awareness, and to use the commenting tool on our social media forums to directly connect with consumers. Specifically, we will implement this strategy through our Facebook page, where we will push information to our target segment about our product and brand. ARES WORK GLOVE Facebook URL: https://www.facebook.com/ARESWorkGlove

INTERNET MARKETING Online advertising accounts for more than 17% of our pull marketing budget. Our Qualtrics results show that our target market is more likely to respond to advertisements on home improvement blogs, websites, and DIY Google Searches.65 We have chosen to rely heavily on increasing our awareness through online advertising because of both our Qualtrics data and Mintel data that states that women would prefer to see advertisements of our product on different forums and banners.66 Online marketing is one of the most effective ways to reach our audience. Our annual budget for online advertising will rise from $80,000 in year one to $250,000 in year five. The result will be that our awareness will increase steadily from 2% in year 1 to 9% in year 5. From a public relations standpoint, it is critical for us to have our product on the radar of home improvement blogs and websites. Our PR budget of $20,000 per year allows us to send out a pair
65 66

Qualtrics Survey. N.p., n.d. Web. 17 Apr. 2013. http://www.qualtrics.com/ Home Improvement- US - February 2011." Mintel . N.p., Feb. 2011. Mintel. Web. 16 Apr. 2013. http://academic.mintel.com.ezproxy.bu.edu/display/566303/?highlight=true#hit1.

36 of gloves to various bloggers and website editors for product reviews. Reaching out to these editors and bloggers and creating a personal relationship with them will help to increase our likelihood of a mention, which will in turn increase our awareness by 3% each year.

INTERNAL OPERATIONS MANAGEMENT Critical Success Factors Our company has determined four Critical Success Factors to help keep our company performance on track with our goals: have a maximum defect rate of 1%, keep return rate below 5%, have an annual minimum awareness increase of 20% the previous years awareness, and maintain 25% of ACV in Big Box stores in year five. Maintaining a maximum defect rate of 1%, outlined in IS Exhibit 1: CSF 1, is critical for our success because product quality affects public perception of our brand. We have steered away from using cheap materials, and have structured our assembly process so that attachments that do not function properly can be recycled. At our last quality inspection, products with minor flaws will be put back into the process and those that cannot be reworked will be scrapped as defects. This ability to rework materials will help cut down costs and ensure that we are putting a quality product out in the market.
IS Exhibit 1: CSF 1

Keeping the return rate below 5%, outlined in IS Exhibit 2: CSF 2, is essential for our success because it is an indicator of customer satisfaction with our product. If our product is received well by our consumers, they will not return our product and reverse distribution numbers will remain low. It is important for us to be able to rapidly communicate changes in product design

37 based on feedback from our customers so that we can fix any malfunctions. We want to keep a dialogue going with the customer so that we are able to get feedback and ensure we are manufacturing a quality product. Maintaining a minimum annual awareness increase of 20% of the previous years awareness, outlined
IS Exhibit 2: CSF 2

in IS Exhibit 3: CSF 3, is critical to our success because higher awareness results in higher sales. We have budgeted for the increase in marketing spending each year, and predict that it will significantly increase our demand. Higher awareness also builds a stronger company reputation and helps create our brand name among our target
IS Exhibit 3: CSF 3

market and prospective customers. In year five, having 25% of ACV in big box stores is critical to our success. Our processes to achieve this are outlined in IS Exhibit 4: CSF 4. Big box retailers account for 56% of total home

38 improvement ACV.67 Achieving an ACV of 25% of home-improvement accessories sold in big box stores, our sales will have a significant boost, resulting in higher profits.

VALUE CHAIN As a start-up company interested in increasing product awareness, our external focus is on marketing and promotions. Our internal efforts are to ensure quality through inspection on the assembly line and to respond to feedback from customers. This will help improve our product, and help match our companys values to those of our target consumer. Our value chain is outlined in IS Exhibit 5: Value Chain.

IS Exhibit 4: CSF 4

67

Home Improvement- US - February 2011." Mintel . N.p., Feb. 2011. Mintel. Web. 16 Apr. 2013. <http://academic.mintel.com.ezproxy.bu.edu/display/566303/?highlight=true#hit1>.

39

Val u e Ch ai n
Acquiring Material & Developing Calling and ordering from the suppliers at ROP Ge ng the rubber, gloves, levels, and plas c molds Product design modifica ons if needed (based on feedbacks) Glove size/fit test; raw material test Shaping raw materials A aching accessories and sewing Inspec ng finished goods

15%
Assembly Line

20%
Distribu on Receiving orders from retailers and Amazon Delivery (e.g. DHL)
Following IMC schedule with regards to adver sements and promo ons Word of mouth about how these gloves are differen ated from others Ge ng feedbacks Using surveys to analyze what customers want

25%
Marke ng & Sales

30%
Customer Service

10%

Running customer service in the office Returning/replacement service for defec ve accessories (i.e. nail holder) Selling/distribu ng the parts separately at stores Including instruc ons/manual in the package

IS Exhibit 5: Value Chain

INVESTMENTS Our company has chosen to purchase Dell Vostro Laptops for our management.68 These laptops were rated as one of the top small business laptops to own. They are lightweight, made of durable materials, and have a three year warranty.69 Dell computers are competitively priced and already have Windows software installed. Our operating system on our computers will be Windows 7 because it is reliable and is compatible with our multi-functioning printer. Each computer will have Norton Anti-Virus software to protect our devices from spyware, viruses, and other harmful programs.

68

Dell Intel Corporation. Dell Vostro v13 Specs & Reviews Notebooks http://www.dell.com/us/business/p/vostro-v13/pd 69 Blum, Jonathan. The 11 Best Laptops for Businesses on the Go February 19, 2011. http://www.businessinsider.com/best-11-laptops-2011-2?op=1

40 We have chosen a Dell Blade PowerEdge Server, which includes data backup, fast performance and large memory.70 We are making a large investment in a quality, multi-function printer.71 We have a main line for our office, which will be housed on the CEOs desk. We have selected Comcast Business Class as our phone and internet provider ($89/month).72 We will also have separate cell phones for each member of the management team. The cell phones provided are Blackberry phones, a reliable business phone that is conference call compatible and allow our managers to be accessible outside the office. Our mobile telecommunications provider will be AT&T. We will have two year contracts for each phone, and have budgeted for upgrade costs and initial phone costs. ARES has decided to implement Epicor as its Enterprise Resource Planning as Epicor has a very compelling performance in controlling operations. Epicor effectively manages quality control, supply chain and order processes, as well as appraising expense structures.

70

Dell Intel Corporation. Dell 12th Generation Power Edge Server http://marketing.dell.com/business-serverinnovation 71 Xerox. Work Centre http://www.office.xerox.com/multifunction-printer/color-multifunction/workcentre-7800series/enus.html 72 Comcast Business Class. Comcast Business Internet, Voice, and TV http://www.comcastbusinessoffers.com/

41

ARES has
IS Exhibit 6: Entity Relationship Diagram

modeled its Entity-Relationship Diagram based on its supply chain, and process

modeling diagram based on its quality control procedures, as you may see in IS Exhibit 6: ERD Diagram.73 Epicors one core competency is in its capability of managing data for all activities regarding operations, a fact that fits best among all other software choices that we had for application software. As a startup company, we expect the defect rate to be relatively high in Year 1 compared to the following years. Also, according to our SG&A (see IS Appendix 6), the marketing budget is expected to increase exponentially; thus, we will need to analyze industry trends so we can forecast demand correctly. Epicor ERP will allow us to create reports for managers to analyze the defect rate and the market for the future in order to ensure our products quality and increase sales; the report will look like the sample report that you may refer to in IS Exhibit 7: Sample Reports (Market Sales Trends and Manufacturing Defect Rate).

73

An ERD is used to express a database and to reveal relationships among entities. ARES ERD shows the database of operations-related entities; it is based off of ARES supply chain in a chronological order. Robertson, Nathan D.M., Ivy Anderson, Adam Chandler, Sharon Farb, Timothy Jewell, Kimberly Parker, and Angela Riggio. "Report of the DLF Electronic Resource Management Initiative." Cornell University. Cornell University Library. http://www.library.cornell.edu/elicensestudy/dlfdeliverables/DLF-ERMI-AppendixC.pdf.

42

IS Exhibit 7: Sample Reports

In an effort to ensure lean manufacturing, Epicor, on a single unified data model, integrates sales, manufacturing, finance, and other important business divisions.74 Epicor Manufacturing Production Software and its built-in business process management (BPM) allows us to look at the big picture of the manufacturing process and sales, so we can correctly forecast and meet market demand on time while minimizing costs of excess or shortage.75 Looking at sales, manufacturing, and finance simultaneously, managers can easily make high-quality and insightful decisions. This real-time and accurate data analysis will lead to a smooth and effective business process. Epicors scalability will allow us to expand our database and allow additional manages control over our operations as our company is expected to expand with the growing sales through the upcoming years until Year 7. Also, Epicor will allow ARES to provide its managers ease access in retrieving the data they need to control operations.
74

Epicor. "Manufacturing Software MRP Software." http://www.epicor.com/Industries/Manufacturing/Pages/Manufacturing-Software.aspx. 75 "Manufacturing Software MRP Software."

43 We chose Epicor ERP, because the implementation of Epicor is the most cost-effective option. It incorporates, at a lower price than the three best-of-breeds, all the necessary features and functions for the ARES business.76
IS Exhibit 8: Process Modeling Diagram (Quality Control)

Inventory Manager

Quality Inspector

Assembly Line Workers

Glove Size/Fit Test

No Good

Raw Material Check

No Good

Receive raw materials

Scrap Scrap Send gloves to the assembly line

Send materials to the assembly line

Process raw materials and send them to the next station Receive processed raw materials

Sew and attach raw materials Send finished goods to the quality inspector Receive finished goods

Check the number of attachments and torn-off parts, and then put them into testing machine
No Good

Scrap
No

We chose to invest in quality hardware and

76

Reworkable ?
Good

Send gloves to Packaging Station

See IS Appendix 3 for software comparisons and more detailed information on our ERP

44 software products to ensure that we are operating on the best systems. IS Exhibit 9: IS Investments contains our IT investment schedule for our first five years.

IS Exhibit 9: IS Investments

IS Investments
Year 0

Year 1
$5 $0

Year 2
$8 $1

Year 3
$9 $1

Year 4
$11 $1

Year 5
$11 $1

Total Employees IT Manager Hardware

Printers Cell Phones Phone Laptops Server
$14,748 $250 $191 $3,500

$0 $0 $0 $0

$0 $156 $0 $2,913

$0 $318 $0 $743

$0 $271 $0 $5,304

$0 $331 $0 $3,091

$1,189

Software
MS Office Sage 50 Complete Accounting Plus Google Apps for Business Norton AntiVirus $750 $289 $83 $30 $0 $885 $255 $93 $1,405 $903 $416 $95 $1,751 $921 $478 $97 $1,786 $940 $595 $99 $994 $607 $161

Other Expenses
Wage for CTO GoDaddy Phone/Internet Bill Ink Paper $0 $1,028 $1,068 $940 $67
$24,134 $24,134

$0
$257

$1,089
$68 $2,648 $2,648

$87,720 $262 $1,111 $978 $70

$96,028 $8,308

$92,159 $267 $1,133 $71

$97,948 $5,789

$96,822 $273 $1,156 $1,017 $73

$108,346 $11,525

$101,721 $278 $1,203 $74

$108,460 $6,739

Total (including wages) Total (without wages)

32

FINANCIAL PROJECTIONS

CORE B2 TEAM 4
Diya SenGupta, Jessica Cao, Andrew Ju, Luke Shapiro, William Byun, Michael Buckley, Natalie Meyer, Dvisha Patel, Dana Butterman

45 NPV AND IRR

FE Exhibit 1: NPV and IRR

Average Weighted Manufacturer's Selling Price to Channel Base Value Value When NPV=0 Percent Change

Year Year Year Year Year 1 2 3 4 5 15.68 15.42 15.47 14.09 13.24 13.09 12.88 12.92 11.77 11.06 -16% -16% -16% -16% -16%

Balancing the interests and wellbeing of investors, family, friends, management, and the company itself was a challenge; we believe in a bright future for this product and therefore want to put the company in the best financial position. After constructing our financial sheets, we have projected a project Net Present Value (NPV) of $701,931 and an Internal Rate of Return (IRR) of 39% (listed in FE Exhibit 1: NPV and IRR). Accordingly, we have determined that investors will have an NPV of $36,578.18 with an IRR of 26%. Family, friends, and management will have an NPV of $665,352.82 and an IRR of 64%. We stand behind these numbers, as our calculations validate the profitability of our project in that we are able to produce a positive NPV as well as an IRR above the required 25%.

FUNDING REQUEST As with every start-up company, we need help from investors in order to meet our goal of becoming not only a profitable company, but also a successful one over the long term. In order to launch our company, ARES Work Glove requires a total initial investment of $295,600. Investors would pay 75%, or $221,700. Friends, family, and management will contribute the other 25% of $73,900. This amount is composed by $87,487 for initial working capital, $42,916 for fixed assets, $56,000 for rent, $45,545 for pre-marketing expenses, and $5,000 for product development.

MANAGEMENT AND INVESTOR OWNERSHIP Ownership of the company is split between 1) investors and 2) a group composed of friends, family, and management. Although the latter group includes the innovators of this product, we will take a 45% ownership stake in the company. This allows the investors to have a majority 55% ownership stake in the company.

46 PROFITABILITY PROJECTIONS Similar to the majority of startup companies, we will have losses for the first four years. As graphed in FE Exhibit 2: Income Statement Ratios, our net income as a percentage of sales will take until year 5 to become positive. This is due in large part to our marketing expenses, because our product perhaps requires more introduction and exposition than other products. These expenses are vital to
FE Exhibit 2: Income Statement Ratios

the success of our company as it will not only help us raise

awareness but will also help build brand recognition. However As recognition increases over the years, our marketing expenses (as a percentage of sales) will decrease while our sales will increase (See FE Exhibit 4). The benefits of these expenses can be seen in the increase in our forecasted sales from Year 1 (46,221 units) to Year 5 (432,482 units).77 As marketing expenses as a percentage of sales decreases steadily over the first five years, net income increases progressively as well. As seen in FE Exhibit 3: Income Statement Financial Ratios, our Year 1 net income is -73.6%. In Years 2 and 3, this increases to -48.3% and 44.2% respectively. While the difference between these two years does not seem significant, our year 4 net income increases to -0.6% of sales a vast difference. The jump between years 3 and 4 can be explained by entry into big box stores, which account for 56% of industry ACV (See MK Appendix 8). These numbers are also
77

FE Exhibit 3

See MK Appendix 9.

47 achieved by not only increasing sales over the years (See MK Appendix 10) but also efficiently managing and decreasing costs (See FE Appendix 3). Year 5 brings our first positive net income with 17.7% as a percentage of sales. BREAK-EVEN Through our calculations, we are confident that the ARES Work Glove will reach an accounting break-even in year 5. By the end of year 5, we will not only successfully achieve our break-even point of 258,146 units, but we will also sell 174,336 units on top of this, which gives us a 40.31% safety margin. At the same time, the sales number of $3,416,688 needed for this breakeven point is exceeded by our expected sales of $5,724,119. Although we do not cross our break-even until year 5, we come extremely close in year 4. Shown in the break-even table below FE Exhibit 5: Accounting Breakeven and FE Exhibit 6: Cash Breakeven, our projected sales in year 4 nearly reach our sales break-even point, which translates into -0.81% of safety margin.
FE Exhibit 4: Accounting Breakeven (including Depreciation Expense)

Accounting Breakeven Sales Needed Units Needed (Units) Projected Sales (Units) Safety Margin

Year 1 Year 2 Year 3 Year 4 Year 5 $1,564,371 $2,034,376 $2,393,807 $3,118,077 $3,416,688 99782 46221 -115.88% 131931 78219 -68.67% 154747 96740 -59.96% 221312 219536 -0.81% 258146 432482 40.31%

FE Exhibit 5: Cash Breakeven (excluding Depreciation Expense)

Accounting Breakeven Sales Needed Units Needed (Units) Projected Sales (Units) Safety Margin

Year 1 Year 2 Year 3 Year 4 Year 5 $1,550,855 $2,022,128 $2,381,892 $3,104,803 $3,403,086 98919 131130 153977 220370 257118 46221 78219 96740 219536 432382 -114.02% -67.64% -59.16% -0.38% 40.55%

CASH FLOWS Described in FE Exhibit 7: Revenue and Cash Flow, we have a negative net cash flow ranging from -$693,383 to -$394,459 in Years 1-4. In Year 5, the same year we break positive in net income, we will have a positive net cash flow of $355,643. Like net income, the drastic increase

48 in cash flows is due to acceptance in Lowes and Home Depot, as well as a reduction in percentage of revenues in marketing, COGS, SG&A, etc.
FE Exhibit 6: Revenue and Cash Flow

SENSITIVITY AND RISK ANALYSIS As a startup company in the home improvement industry, there are many factors that may affect ARES. Our risks stem from the uniqueness of our product. This is the first work glove that incorporates attached small tool attachments and a nail-holding device of any kind. The problem that our glove solves exists-- that home improvement projects can get messy and tools can get misplaced. Thus the risks we face rely on the perception of consumers on how effectively our product makes home improvement safer, easier, and more efficient.
FE Exhibit 7: Adjusted Purchase Intent

Adjusted Purchase Intent Base Value Value when NPV=0 Percent Change

Year 1 12.39% 9.83% -21%

Year2 12.39% 9.83% -21%

Year 3 12.13% 9.62% -21%

Year 4 12.97% 10.29% -21%

Year 5 13.52% 10.73% -21%

In order to predict potential risks, we ran a sensitivity analysis on a wide range of variables based on our critical success factors. These numbers help us understand the amount a variable can change, all else constant, before our NPV becomes $0. The variables we chose to analyze are

49 average weighted manufacturers selling price to channels, adjusted purchase intent, awareness, ACV, and marketing expenses (excluding sales force and manufacturers representatives). From our sensitivity analysis, we learned that purchase intent can decrease by 21% before our NPV becomes zero. In order to keep our purchase intent from falling extremely low, we must ensure our marketing team positions our product correctly. Our survey may skew purchase intent because survey participants were only presented with the idea, a description and a sketch of our product. In reality, there exists a possibility that consumers may not be as satisfied with our design as expected.
FE Exhibit 8: Awareness

Awareness Base value Value when NPV=0 Percent Change

Year 1 13.15% 10.43% -21%

Year 2 18.33% 14.54% -21%

Year 3 21.81% 17.30% -21%

Year 4 28.26% 22.42% -21%

Year 5 37.89% 30.06% -21%

Having a high level of awareness is an important factor for our success as the more we can reach our potential consumers the better. According to our sensitivity analysis, awareness can decrease by 21% before our NPV drops to zero. We are currently following rule-of-thumbs for our awareness generation.78 In certain cases, we mark up from rule-of-thumbs due to increased spending. Should customers perceive our product to be less effective than we expect, awareness will not spread as fast.
FE Exhibit 9: ACV

ACV Base Value Value when NPV=0 Percent Change

Year 1 14.16% 11.23% -21%

Year 2 15.80% 12.53% -21%

Year 3 18.25% 14.48% -21%

Year 4 29.89% 23.71% -21%

Year 5 52.66% 41.77% -21%

Our ACV can drop 21% before our NPV becomes zero. Because the hardware industry is dominated by two big box stores, Home Depot and Lowes, being accepted into these is crucial for our success. We expect to be accepted into these big box stores by year 4. However, should

78

IMC and Awareness lecture

50 consumers find our product to be less effective than in theory, our big box acceptance may be delayed. For our top three risks--purchase intent, awareness, and store acceptance, our top plan is to redesign our product. We are confident that home improvement can be made more efficient, safer, and quicker, and that consumers would buy a product that achieves such a goal. If we have a problem with one of our top three risks, it would stem from customer satisfaction, which relies on the design of our product. Thus, if we learn that customers perceive the ARES Work Glove to be too complicated, nondurable, or cumbersome, etc., we will redesign our product to more effectively improve DIY projects
FE Exhibit 10: Average Weighted Manufacturers Selling Price to Channel (Years 1 -5)

We determined that our weighted manufacturers selling price can decrease by 16% before our NPV becomes zero. To mitigate this risk of lowering our prices, we need to build strong brand recognition in the beginning years to keep demand high. This will allow us to maintain our targeted retail prices, which will in turn maintain our desired manufacturers price.

Marketing Expenses (Excluding Sales Force And Manufacturing Reps) In comparison to the other variables analyzed, marketing expenses are considered less risky as this variable can increase by 37% before our NPV will be zero. To alleviate this risk, we must carefully consider the costs of our marketing efforts before we put them into effect. Additionally, ensuring each campaign is as effective as possible means in the long term we can decrease the amount spent on marketing expenses. We must strike the proper balance between spending in order to generate awareness and minimizing marketing costs.

Other RISK: Early Competition Risk Should the design of our glove prove to be more effective and should we generate buzz more quickly than we expect, our sales will be significantly higher in early years. Currently, we do not expect to turn a positive net income or cash flows until year 5, thus we expect competition to

51 enter in the same year. However, if we turn a positive profit earlier, or if demand increases faster than we expect, competition will enter earlier and negatively impact our sales sooner. For early competition, we would have to change our marketing campaigns. Instead of conveying the benefits and producing informative ads, we would have to convince consumers that our product solves the problem more effectively than our competitors. We would start a campaign with the message that our product is the original accessory glove and that ARES is the expert in work glove accessories.

PRODUCT UNIQUENESS Each year, people accidentally injure themselves when attempting to fix up their homes or completing home improvement projects. The ARES Work Glove is a new and unique product that has different functionalities to separate us from our competitors. This glove facilitates the process of placing nails in difficult places, simple sanding capabilities, and a leveling tool. These unique features allow us to have a positive NPV. Our main competitor is Ironclad who makes a successful glove that is fairly expensive. Our product, compared to Ironclads, is slightly cheaper and can assist customers in performing multiple home improvement jobs around their homes.

INVESTORS Investors want to be a part of a project that they believe in. Not only will investors want to be a part of this project because of the high project IRR of 39% , but also because of an investor IRR of 26%. As this industry is growing it is prime for new products to enter the market.79 Not only did we find a need for this product, we are proud to say that we found a solution to a common problem. Also, we have projected that the product will last approximately 25-30 years with a growth rate slowly declining beginning after year 7 at a rate of -3.48%. Overall, the home improvement industry is an attractive one to penetrate.80

79 80

Mintel April 5th 2013 http://mintel.com Mintel April 5th 2013

52 TERMINAL VALUE Our terminal value is $7,119,181. We calculated this value using a 25% discounted NPV of cash flows of every year after year 5 and the value of our product life after a constant decline begins. We projected revenues, expenses, and changes in assets for years 6-8 to calculate the cash flows in those years. To estimate future revenues, we estimated future demands by calculating future ACVs and prices. We calculated changes in assets using ratio estimates from previous years. To calculate the value of our product over its remaining life, we found the peak year and estimated the constant decline rate in years after. Using our years 6-8 cash flows, we determined year 7 is our peak year and has a constant decline rate of 3.48% a year. Thus the value of our product over its life after year 7 was equal to year 8 cash flows of $2,119,418 divided by the 25% IRR minus the negative growth rate of -3.48%. This gave us a life value of $7,441,811. Using a 25% interest rate, and inputting cash flows equal to the cash flows of year 6, and cash flows of year 7 added to our remaining value, we calculated year 5 NPV to be $7,119,181.

SCENARIO SUMMARIES Base Scenario The base case sales projections were found using our most realistic assumptions about figures that affect the demand for our product. However, as a startup company we realize that we must also consider pessimistic and optimistic case scenarios. These were calculated by altering variables such as purchase intent, store acceptance, and impressions that directly change the demand our target market has for our gloves.

Pessimistic For the pessimistic case, we decided to decrease purchase intent by 1 percent for years and prices. Purchase intent plays a huge role in sales and since our data comes from a survey taken by only a small portion of the people who will actually buy our product, it makes sense for us to assume that in a pessimistic case, the probably buys and definitely buys would be smaller than expected. When looking at the IMC in particular, we assume that in a pessimistic scenario it will take an extra impression in the magazine advertisement for a consumer to become aware of the product. We therefore divided the targeted impressions by 5 instead of 4, giving us a lower awareness percentage. Since our target market of 20 million is right at the brink of whether our

53 efforts reach 0.04% or 0.06% awareness, for the base case we decided to go with 0.06% because we are confident that our marketing campaign is strong enough to impress our potential consumers and clients.81 However, in the pessimistic scenario we put our target market in the Size C Classification, only receiving 0.04% awareness per thousand dollars.82 If this promotion does not go as planned, we have to decrease the awareness percentage. We approached our buses and billboards promotion with similar logic. For the base case scenario, we believe that our advertisements are strong enough to reach 0.03% awareness per thousand dollars; however, in a pessimistic scenario we have to place ourselves in another category that only raises 0.02% awareness per thousand dollars. We also decreased online and blogs awareness by 1%, and point of purchase and our public relations awareness would each go down by 0.5% for the pessimistic scenario. Lastly, we adjusted store acceptance for chains and big box stores. In our base case, in the first year we enter a chain or big box store, we are accepted by 40% of their stores. In our second and later years, we are carried by 60% of their stores. Instead of 40% and 60% in the first and second years, in our pessimistic case we are carried by 30% and 50%, respectively. These are all main factors that influence the forecasted demand for our product and in the worst case, they will all drop as depicted in FE Exhibit 11.
FE Exhibit 11: Sales Breakdown Base, Pessimistic, and Optimistic

Year 1 Base Case $724,645

Year 2

Year 3

Year 4

Year 5

$1,103,350 $1,496,493 $3,093,054 $5,724,119 $788,863 $1,063,520 $2,269,586 $4,603,195

Pessimistic Case $482,231 Optimistic Case

$1,024,324 $1,500,287 $2,054,672 $3,667,641 $6,719,127

Optimistic In an optimistic scenario, which we are confident is more likely to happen than the pessimistic scenario, due to the need for a product like ours as well as the strong industry we are competing in, we find it reasonable to increase purchase intent by one percent across all years and retail pricing. As for the print advertisements, we calculated awareness by dividing the targeted impressions by 3 instead of 4, assuming that it would take fewer views of the ads to make a

81 82

IMC and Awareness lecture IMC and Awareness lecture

54 consumer aware of our product. For trade shows, we decided that an optimistic scenario would call for a 0.08% awareness percentage instead of the 0.06% used in the base case. Similarly for buses and billboards, we assumed 0.04% awareness per thousand dollars compared to the 0.03% in the base case. Both the point of purchase and the public relations awareness will each increase by 0.5%. Additionally, our product is carried by 50% of chain and big box hardware stores in the first year they are entered, in contrast to 40% in our base case. In our second and later years in those retailers, we are carried by 70% of their stores.

SCENARIO IMPLICATIONS Our scenarios heavily impact our sales figures. As shown in FE Exhibit 11, optimistic inputs drastically increase sales, while pessimistic inputs drastically decrease sales. With changes in sales, alterations must be made to operations to function efficiently. An advantage to our operations is that our capacity is strongly influenced by our number of workers. In the case of a pessimistic scenario, we would hold off hiring new employees. If demand does not meet our initial output capabilities as years progress, we will consider laying off factory workers and consolidating tasks. In case of an optimistic scenario, we will hire extra workers to keep up with project demand. By not investing in expensive fixed asset machinery, our cycle times remain fluid, and depend on the number of workers which can be raised or lowered in accordance with demand. We also considered competition, which enters in year 5 in our base case. Because sales and awareness are low in our pessimistic case, competition does not arrive at all in the first 5 years. On the other hand, competition arrives in year 4 in our optimistic case, a year earlier than in our base case.

We assign a fairly low probability to our optimistic case and an even lower chance to our pessimistic case. We are Pessimistic Weight NPV Weighted NPV 10% Base 70% Optimistic 20% confident in the answers of our survey results and therefore thus we give our base case a 70% weight. The optimistic case is weighted higher than the

$(1,357,163.49) $701,931.00 $1,268,130.08 $609,261.37

FE Exhibit case 12: Weighted NPV Calculation pessimistic since our product is unique and we believe the design will effectively make

55 home improvement tasks safer, quicker, and more efficient. Our weighted NPV is $609,261 (as shows in FE Exhibit 14: Weighted NPV Calculation)EXHIBITslightly lower than our base case because of the losses of the pessimistic case.

CONCLUSION Although we do not turn positive net income or cash flows until year 5, we are confident our project will be worthwhile in the long run. We experience negative incomes in our first three years, but this is due in large part to high marketing expenses. We devote such a large portion of our budget to marketing to be accepted by Home Depot and Lowes. Together, these two big box stores account for over half of all hardware industry sales, thus once we enter these retailers our sales will increase dramatically. As a result, our year 5-7 sales will be high. Beginning after year 7, we will start to experience a decline, but the long life cycle of our product will ultimately give our project a worthwhile IRR of 39% and NPV of $701,931.

56

CONCLUSION
As the home improvement market makes a comeback, our company plans to capitalize with our innovative new work glove. The ARES Work Glove will be the first product to enter the industry with multi-functional features offering a unique Do It Yourself experience. We differentiate ourselves from our competitors through the enhanced safety, efficiency and ease of use of the product. This business plan integrates operations, marketing, information systems, and finance to ensure our investors that the ARES Work Glove is ready to enter the market and will be a profitable product for many years to come.

ARES Work Glove Improving Home Improvement.

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