What is burn rate?

Keywords: burn rate

Definition of burn rate

Burn rate is the rate at which a company is losing money. It is typically expressed in monthly terms. E.g., "the company's burn rate is currently $65,000 per month." In this sense, the word "burn" is a synonymous term for negative cash flow. It is also measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.

The term came into common use during the dot-com era when many start-up companies went through several stages of funding before emerging into profitability and positive cash flows and thus becoming self-sustainable (or, as for the majority, failing to find additional funding and sustainable business models and thus going bankrupt). In between funding events, burn rate becomes an important management measure, since together with the available funds, it provides a time measure to when the next funding event needs to take place.

Some entrepreneurs and investors say that part of the reasons behind the dot-com bust was the unsound management and financial investor practices to keep the burn rate up, taking it as a proxy for how fast the start-up company was acquiring a customer base.

The term burn rate can also refer to how quickly individuals spend their money, particularly their discretionary income. For example, Mackenzie Investments commissioned a test to gauge the spending and saving behavior of Canadians to determine if they are “Overspenders.”

Source: Wikipedia

Corporate entrepreneurship is a concept that has acquired more and more importance in the last few years

Keywords: Howard Stevenson; Carlos Jarillo; Entrepreneurial Management; corporate entrepreneurship 

A Paradigm of Entrepreneurship: Entrepreneurial Management

By HOWARD H. STEVENSON

Harvard Business School, Boston, Massachusetts, U.S.A.

J. CARLOS JARILLO

IMD, Lausanne, Switzerland

Corporate entrepreneurship seems to many entrepreneurship scholars a contradiction in terms. This paper represents an attempt to bridge that gap. This is done by, first, reviewing the literature on entrepreneurship, trying to summarize it in a few major themes. Second, a view of entrepreneurship is proposed that facilitates the application of the previolus findings to the field of corporate entrepreneulrship. Finally, a series of propositions are developed, as instances of the kind of research that can be pursued by following the proposed approach. Corporate entrepreneurship is a concept that has acquired more and more importance in the last few years. Serious, scholarly work has appeared on the subject (see, for instance, Burgelman, 1983a,b, 1984a,b, Nielsen, Peters and Hisrich, 1985; MacMillan, Block and Subba Narasimha,

1986; Hisrich and Peters, 1986; MacMillan and Day, 1987; for some recent examples). Generalinterest books have also made an impact (Brandt, 1986; Hisrich, 1986; Kanter, 1983, 1989), and some of them have even reached best-seller lists (Pinchot, 1985). The very existence of this issue of the Strategic Management Journal testifies to the credibility gained by the concept among experts in business management.

Yet, when reading much of the literature on entrepreneurship as such, to which corporate entrepreneurship should be somewhat related (perhaps as is a species to its genus), one finds an implicit definition of entrepreneurship as something which is radically different from corporate management. Indeed, some writers find it to be the opposite of corporate management (Vesper, 1985). Thus, the very concept of corporate entrepreneurship sounds to many entrepreneurship scholars as something of an oxymoron.

What is, then, behind that surge of the corporate entrepreneurship construct? There is no doubt that, of late, entrepreneurship in general has gained its status as a legitimate scholarly research subject, enjoying in addition much public interest (Vesper, 1988). This is evidenced by the appearance of new academic journals, such as the Journal of Business Venturing; by the fact that mainstream journals carry more and more articles on related issues (Churchill and Lewis, 1985); and by the growth of interest in non-academic publications, which has been even faster (see McClung, J. J. and J. A. Constantin, 'Nonacademic literature on entrepreneurship: An evaluation', in Kent et al., 1982). As of today, there is practically no business school without at least one course on entrepreneurship (Porter and McKibben, 1988).

THREE MAIN STREAMS OF RESEARCH

The plethora of studies on entrepreneurship can be divided in three main categories: what happens when entrepreneurs act: why they act; and how they act. In the first, the researcher is concerned with the results of the actions of the entrepreneur, not the entrepreneur or even his or her actions per se. It is generally the point of view taken by economists, such as Schumpeter, Kirzner, or Casson. The second current may be termed the psychological/sociological approach', founded by McClelland (1961) and Collins and Moore (1964), in the early 1960s. Their work provides a useful emphasis on the entrepreneur as an individual, and on the idea that individual human beingswith their background, environment, goals, values, and motivations-are the real objects of analysis. The causes of individual entrepreneurial action constitute the primary interest of the researcher. Both the individual entrepreneur and the environment as it relates to the motives of individual entrepreneurial behavior are considered. It is the why of the entrepreneur's actions that becomes the center of attention. Finally, how entrepreneurs act can ... Read more ...

Supply Chain Management: Build To Order

Keywords: build to order

Source Wikipedia

Definition

Build to order (BTO) and sometimes referred to as make to order or made to order (MTO), is a production approach where products are not built until a confirmed order for products is received. BTO is the oldest style of order fulfillment and is the most appropriate approach used for highly customized or low volume products.

"Made to order" products are also common in the food service industry, such as at restaurants.

Overview

This approach is considered good for highly configured products, e.g. automobiles, bicycles, computer servers, or for products where holding inventories is very expensive, e.g. aircraft.

In an automotive context, BTO is a demand driven production approach where a product is scheduled and built in response to a confirmed order received for it from a final customer. The final customer refers to a known individual owner and excludes all orders by the original equipment manufacturer (OEM), national sales companies (NSC), dealers or point of sales, bulk orders or other intermediaries in the supply chain. BTO excludes the order amendment function, whereby forecast orders in the pipeline are amended to customer requirements, as this is seen as another level of sophistication for a build to stock (BTS) system (also known as build to forecast (BTF)).

BTS is the dominant approach used today across many industries and refers to products that are built before a final purchaser has been identified, with production volume driven by historical demand information. This high stock level, endemic across the auto industry allows some dealers to find an exact or very close match to the customer’s desired vehicle within the dealer networks and supplier parks. The vehicle can then be delivered as soon as transport can be arranged. This has been used to justify stock levels. Whilst providing a rapid response to customer demand, the approach is expensive, mainly in terms of stock, but also transportation as finished goods are rarely where they are required. Holding stock of such a high cash value as finished goods is a key driver of the current crisis in the automotive industry - a crisis that could be eased by implementation of a BTO system.

A BTO system does not mean that all suppliers in the supplier chain should be producing only when a customer order has been confirmed. Clearly, it would not make economic sense for a manufacturer of low value high volume parts to employ BTO. It is appropriate that these should be identified and built to a supplier order, effectively BTS. Part of the challenge in a BTO supplier network is in the identification of which suppliers should be BTO and which BTS. The point in the supply chain when this change occurs is called the ‘decoupling point’. Currently, the majority of automotive supply chains lack a decoupling point and the dominant BTS approach has resulted in billions of dollars of capital being tied up in stock in the supply chain.

Some firms build all their products to order while others practice (BTS). Given the widespread proliferation of products, there are a number of manufacturers taking a combined approach, where some items are BTS and others are BTO, which is commonly referred to as "hybrid BTO".

The main advantages of the BTO approach in environments of high product variety is the ability to supply the customer with the exact product specification required, the reduction in sales discounts and finished good inventory, as well a reduction in stock obsolescence risk. The main disadvantage of BTO is manufacturers are susceptible to market demand fluctuations leading to a reduced capacity utilization in manufacturing. Hence, to ensure an effective use of production resources, a BTO approach should be coupled with proactive demand management. Finding the correct and appropriate balance of BTO and BTS to maintain stock levels appropriate to both the market requirement and operational stability is a current area of academic research.

Related approaches to BTO include the Engineer to Order (ETO) approach, where after an order is received, a part of or the whole design is done, as well as the Assemble to Order (ATO). Together with the BTS approach, these strategies form the spectrum of order fulfillment strategies a firm can adopt.

How will e-Commerce will redefine the concept of Brick and Mortar businesses (B&M)

Keywords: brick and mortar

Brick and mortar (also bricks and mortar or B&M) refers to a physical presence of an organization or business in a building or other structure. The term brick-and-mortar business is often used to refer to a company that possesses or leases retail stores, factory production facilities, or warehouses for its operations. More specifically, in the jargon of e-commerce businesses in the 2000s, brick-and-mortar businesses are companies that have a physical presence (e.g., a retail shop in a building) and offer face-to-face customer experiences.

This term is usually used to contrast with a transitory business or an Internet-only presence, such as fully online shops, which have no physical presence for shoppers to visit, talk with staff in person, touch and handle products and buy from the firm in person. However, such online businesses normally have non-public physical facilities from which they either run business operations (e.g., the company headquarters and back office facilities), and/or warehouses for storing and distributing products. Concerns such as foot traffic, storefront visibility, and appealing interior design apply to brick-and-mortar businesses rather than online ones. An online-only business needs to have an attractive, well-designed website, a reliable e-commerce system for payment, a good delivery or shipping service and effective online marketing tactics to drive web traffic to the site. Governments are also adopting e-government approaches, which is the use of online services for citizens to enable them to fill in government forms, pay tax bills and register for government programs online; these services aim to cut bricks and mortar costs (building leasing/purchase and staff costs) and improve services to citizens (by offering 24/7 access to information and services).

The divergence between brick-and-mortar businesses and online businesses has expanded in the 2000s as more and more entrepreneurs and established organizations create profitable products known as web "apps" (software applications) and mobile apps. Many web and mobile apps are digitally distributed to customers online and offer value without delivering a physical product or direct service, thereby eliminating the need for manufacturing products, warehousing them, and distributing them using shipping and delivery services and/or physical retail outlets. As well, due to the shift to digital media in audio and video, stores are able to sell digital audio files of songs or digital movies or TV shows over the Internet, either by selling the file to the customer or allowing, for a subscription fee, the consumer to "stream" the songs, movies or TV shows to their digital device. Furthermore, the advent of reliable, affordable remote business collaboration tools such as teleconference phone systems and videoconferencing systems (e.g., Skype) diminishes the need for physical business buildings and offices for many Web and mobile product businesses.

Some stores have both a strong bricks and mortar presence and extensive online shopping services. Examples include Best Buy, Walmart, and Target. While these stores are primarily known as brick-and-mortar businesses, they also have major online shopping websites. In the 2010s, the presence of online stores is adversely affecting some bricks and mortar-only businesses, as some customers are engaging in "showrooming". Customers who are "showrooming" go to a local bricks and mortar store's showroom to test and try out products, and then note the brand and model number, and leave the brick and mortar store and then buy the product from an online store, often for a lower price. Some bricks and mortar stores state that this trend is decreasing their sales. Read more....

Bottleneck in production and project management

Keywords: bottleneck, short-term bottleneck, log-term bottleneck, identifying bottlenecks

In production and project management, a bottleneck is one process in a chain of processes, such that its limited capacity reduces the capacity of the whole chain. The result of having a bottleneck are stalls in production, supply overstock, pressure from customers and low employee morale. There are both short and long-term bottlenecks. Short-term bottlenecks are temporary and are not normally a significant problem. An example of a short-term bottleneck would be a skilled employee taking a few days off. Long-term bottlenecks occur all the time and can cumulatively significantly slow down production. An example of a long-term bottleneck is when a machine is not efficient enough and as a result has a long queue.

Example illustration of a bottleneck in a manufacturing material flow

An example is the lack of smelter and refinery supply which cause bottlenecks upstream.

Another example is in a surface-mount technology board assembly line with several pieces of equipment aligned. Usually the common sense is driven to set up and shift the bottleneck element towards the end of the process, inducing the better and faster machines to always keep the PCB supply flowing up, never allowing the slower ones to fully stop, a fact that would be heeded as a deleterious and significant overall drawback on the process.

Identifying bottlenecks

Almost every system has a bottleneck, even if it is a minor one, if every system was running at full capacity, at least one machine would be accumulating processes. Identifying bottlenecks is critical for improving efficiency in the production line because it allows you to determine the area where accumulation occurs. The machine or process that accumulates the longest queue is usually a bottleneck, however this isn't always the case. Bottlenecks can be found through: identifying the areas where accumulation occurs, evaluating the throughput, assessing whether each machine is being used at full capacity and finding the machine with the high wait time.

Accumulation

When input comes in faster than the speed of the process, accumulation starts to occur. This means that the machine either does not have enough capacity, is not being fully utilized (inefficient in use) or has an under-qualified operator. This method is not effective at identifying bottlenecks where the queues are at several process steps, as there are multiple processes with accumulation.

Throughput

Since the production line is directly linked to the output of the machines, it allows for the identifying of the main bottleneck in the manufacturing process. In changing each machines throughput, it will be possible to assess which machine affects the overall output the most, and hence determine the bottleneck in the chain of processes. 

Full capacity

By using the utilization percentage of each production unit, it is possible to determine the machine which uses the highest percentage of its capacity. This machine is bottlenecking the other machines by 'forcing' them to operate at a lower capacity. However, if all machines in the chain of processes are running at a similar capacity level, increasing the capacity of the lowest machine will not create a significant improvement to the total output.

Wait times

In the case where several production units are already running at full capacity, tracking the down time of machines will allow you to identify which machine is being bottlenecked. Usually the machine prior the machine with the highest wait or down time in the chain of processes is a bottleneck. The result of this is a machine being under utilized. Read more...

Growth–share matrix

Keywords: growth–share matrix, boston matrix, bcg matrix, cash cows

Definition

The growth–share matrix (aka the Product Portfolio Matrix, Boston Box, BCG-matrix, Boston matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that was created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations to analyze their business units, that is, their product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis. Some analysis of market performance by firms using its principles has called its usefulness into question.

Overview

To use the chart, analysts plot a scatter graph to rank the business units (or products) on the basis of their relative market shares and growth rates.

Portfolio growth-share matric

Cash cows is where a company has high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, yet corporations value owning them due to their cash-generating qualities. They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.

Dogs, more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.

Question marks (also known as problem children) are businesses operating with a low market share in a high-growth market. They are a starting point for most businesses. Question marks have a potential to gain market share and become stars, and eventually cash cows when market growth slows. If question marks do not succeed in becoming a market leader, then after perhaps years of cash consumption, they will degenerate into dogs when market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.

Stars are units with a high market share in a fast-growing industry. They are graduated question marks with a market- or niche-leading trajectory, for example: amongst market share front-runners in a high-growth sector, and/or having a monopolistic or increasingly dominant unique selling proposition with burgeoning/fortuitous proposition drive(s) from: novelty (e.g. Last.FM upon CBS Interactive's due diligence), fashion/promotion (e.g. newly prestigious celebrity-branded fragrances), customer loyalty (e.g. greenfield or military/gang enforcement backed, and/or innovative, grey-market/illicit retail of addictive drugs, for instance the British East India Company's, late-1700s opium-based Qianlong Emperor embargo-busting, Canton System), goodwill (e.g. monopsonies) and/or gearing (e.g. oligopolies, for instance Portland cement producers near boomtowns),[citation needed] etc. The hope is that stars become next cash cows.

Stars require high funding to fight competitors and maintain their growth rate. When industry growth slows, if they remain a niche leader or are amongst the market leaders, stars become cash cows; otherwise, they become dogs due to low relative market share.

As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually, the market stops growing; thus, the business unit becomes a cash cow. At the end of the cycle, the cash cow turns into a dog. Read more...

Entrepreneurship as a Resource

Keywords: Entrepreneurs in the marketplace
By The Federal Reserve Bank of Dallas

When any good or service is produced, resources are necessary. All of the world’s productive resources can be grouped into four broad categories: land, capital, labor and entrepreneurship. Land represents more than just the lot where a business is built. It includes a wide range of natural resources—the fertile soil, various minerals, fossil fuels, food crops and water, just to name a few. Capital is made up of manufactured resources such as the buildings, equipment, hardware and tools needed for production. Labor is also called a human resource because it includes all the people involved in the production process—for example, the farmers, accountants, cab drivers, barbers, assemblyline workers, computer programmers, etc., who provide skills and expertise to build products or offer services in exchange for wages and salaries. The fourth type of productive resource is entrepreneurship. An entrepreneur is the person who assumes the risk of acquiring the other resources necessary to begin production of a good or service. 

Usually, it is easy to identify the labor, the land and the capital resources that are used in production. When friends go to dinner at their favorite restaurant, the meals are prepared by a chef and served by a waiter. The vegetables were grown on a farm and cooked on a stove. But how did all those resources come together to allow the restaurant to operate? It was the entrepreneur who conceived the idea for the restaurant, procured the building, hired the staff, bought the stove, purchased the ingredients and assumed the risk of its success.

[...] Entrepreneurs in the Marketplace

Entrepreneurs and the innovation they often bring to the marketplace are the driving forces in a market economy. The market might be as narrow as a neighborhood or a city or as broad as a nation or even the entire world, but the entrepreneur sees the opportunity to launch a new idea and assumes the risk of its success. Profits are the way the market signals to entrepreneurs that they are on the right track. Profits reward the entrepreneur for doing things that customers value. Likewise, financial losses are the way the market signals that a product or idea may not provide enough value to the customer. This is the risk of entrepreneurship. If the entrepreneur pays for the resources required to produce a product or service but fails to sell it for a profit, the business will eventually shut down. The market can be a harsh critic and a sound judge.

[...] Globalization

It appears that entrepreneurs will face both opportunities and challenges throughout the 21st century. Globalization—which is the increasing integration of the world’s economies through the flow of goods, services, financial capital and people across national borders—will play a significant role. This phenomenon has presented entrepreneurs with opportunities by opening new markets where resources are available and goods and services can be sold. Small firms can access new technologies and methods of production, allowing them to compete with more established firms. Through globalization, information and knowledge are widely available and easy to share. Download the full article (24 pages)