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N T E R N A T I O N A LB
U S I N E S SS
C H O O L JÖNKÖPING UNIVERSITYB U S I N E S S P L A N
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S T Å L B R O H O U S E L L C
MASTER THESIS IN ENTREPRENEURIAL MANAGEMENT Author(s): Stålbro, Sonna; Todorov, Yanko
Tutor: Dalzotto, Cinzia Jönköping June 2008
Acknowledgements
This Master Thesis is a result of many individuals assisting us in the necessary information we needed to create this plan. We want to thank the various Swedish housing companies, specifically Anebyhus for their cooperation in our efforts to obtain the necessary information needed to write this thesis.
We also want to thank the various professors in the Department of Entrepreneurship who not only taught us but inspired us to put into practice their teachings. A special thanks to our supervisor Cinzia Dalzotto for her guidance and encouragement in the realization of this thesis.
Master Thesis in Entrepreneurial Management
Title: Business Plan of StålbroHouse LLCAuthor: Sonna Stålbro, Yanko Todorov Tutor: Cinzia Dalzotto
Date: 2008-06-05
Subject terms: Entrepreneurship, Business Plan, Swedish Housing Distributing Firm
ABSTRACT
Background: The current condition of the U.S. housing market has created a possible shift in the way people are purchasing homes today. U.S. housing statistics show that the average person moves every five years, but now with a cooling market people are no longer making quick capital gains off of their property. This means that people are now becoming more conscious of what they buy and why they are buying. People are realizing that home ownership may be moving towards a long term investment rather than a quick flip.
Housing is the Seattle, Washington area is expensive. Environmentalists are urging U.S. residents to research ways they can make their homes more efficient and friendlier to the environment. However, the problem really lies in the construction techniques of the U.S. housing industry. People pay enough for their poorly constructed homes as it is, most families are unwilling to pay the extra expense that is necessary to increase the efficiency of their home. StålbroHouse noticed this gap in the U.S. market and wants to bring Swedish prefabricated homes that are superior in construction and design elements. They also require a fraction of the energy U.S. homes consume and are affordable for the average middle class family.
Before beginning operations, to get some initial knowledge about the industry, trends, customers etc., we contacted the Washington State Housing Finance Commission. In addition, an informal interview was conducted to enhance our knowledge on the typical customer and what customers commonly base their purchasing decisions on. In order to get an even better understanding about the customers, we visited the annual Home Show at the Seattle Convention Center in January of 2008. We distributed feasibility surveys to get an
even better understanding for what people want in a home. This enabled us to get closer to the target group. To get a better idea of competitors and in particular their marketing efforts, we called a couple of them directly. In some cases, we spoke with their marketing managers.
Purpose: The purpose of this Thesis/Business Plan is to outline the direction StålbroHouse plans to take in its first years of operation as well as explain why we think this is a viable business. This document will also serve to communicate the companies ideas and projections to future investors and (or) so that we can obtain a bank loan to assist in the capital necessary to begin operations.
Method: We used a combination of relevant theory that was applicable to the desired outcomes of the Thesis/Business Plan. Relevant industry statistics, charts, and information was incorporated with the theory that enabled us to produce a business plan that was backed up by academic findings as well as market research. This aided in the creation of a Businesss Plan that would allow StålbroHouse to demonstrate their projections for the first years of operations.
However, as with any business plan, it is important to remember that outside factors, market changes etc. can mean the need to deviate from the initial plan.
Table of Contents
ACKNOWLEDGEMENTS…………...………..…...…ii
ABSTRACT……….ii
1. Executive Summary….………...………....……....1
1.1. Statement and purpose ………….………...……1
1.2. Company presentation………...……….…….1
1.3. Problem and background……...……….….2
1.4. Business conception…………...……….…3
1.4.1. Product and service……….………....3
1.4.2. Target market and customers……….……….4
1.4.3. Management team and core competence……….………...4
1.4.4. Key success factors………..…...5
1.4.5. Business process……….5
1.4.6. Pricing strategy………..….6
1.4.7. Financial forecast………....7
2. Opportunity Recognition………...8
2.1. Current situation in Washington state’s real estate market……….8
2.1.1. Prices and factors affecting the market………...…....9
2.1.2. Technological development………...…12
2.2. Current situation in the Swedish market………14
2.3. Opportunity gap……….18
3. Attracting Financial Resources………...…22
3.1. Potential Investors……….22
3.1.1. Banks……….24
3.1.2. Venture Capitalists………24
3.1.3. Business Angels………....25
3.1.4. Preferred Lender………...25
3.2. Role of a Business Plan……….26
4. Real Estate Industry Analysis………...28
4.1. Real estate industry description………28
4.2. Potential customers………...28
4.3. Potential competitors………29
5.1. Proactiveness……….31
5.2. Risk taking……….32
5.3. Innovativeness………...33
5.4. Autonomy………..33
5.5. Competitive aggressiveness………..34
6. Marketing Plan……….35
6.1. Target market and customers………35
6.2. Promotion and advertisement strategy………..36
6.3. Pricing strategy……….37
6.4. Distribution………...38
6.5. Green marketing………...………39
6.6. Sales strategy and forecast………39
7. Management……….41
7.1. Governance structure………41
7.2. Management team……….42
8. Start – Up Requirements and Financial Forecasts………...45
8.1. Business license………45
8.2. Capital requirements……….45
8.3. Capital expenditures,cash flow statement and financial forecast.46
9. Growth Opportunities and Escape Options………..49
9.1. Growth opportunities………49
9.2. Exit options………...…50
10. Conclusions………...52
References………..53
Appendices
Appendix1: Feasibility Questionnaire………...57
Appendix2: Possible Swedish Housing Suppliers………...58
Appendix3: Cash Flow Statement………59
Appendix4: Startup Costs……….60
Appendix5: Anebyhus Blue prints for the Company Office
Charts
Chart 8.1 Cash – flow chart………..46
Chart 8.2 Sales to different type of customers by year (forecast)………48
Graphs
Graph 2.1 Exponential growth of GDP and the U.S. Housing Valuation in trillions USD………..10Graph 2.2 States with competitive green power offerings………...14
Graph 2.3 Annual Inflation Percentage Rate 2003-2007……….15
Graph 2.4 GDP growth, annual average in percent, 2002-2006………..15
Graph 2.5 The world’s most competitive countries, Ranking 2007………16
Graph 2.6 Real Estate transparency index–Europe, the Middle East and Africa, 2006……….17
Graph 2.7 Bureau of Statistics numbers of houses sold………..18
Graph 6.1 Kotler’s positioning strategies………....37
Tables
Table 1.1 Financial forecast extract for the first 5 years………...7Table 2.1 U.S. GDP real growth rate………....9
Table 2.2 Historical Inflation rate in USA………...11
Table 6.1 Sales Forecast for StålbroHouse ……….40
1. Executive Summary
1.1 Statement of Purpose
StålbroHouse is a Washington based housing company that will offer benchmarked prefabricated homes (from Sweden) that will be shipped to Washington to be constructed on site when purchased by either a developer or an individual client. StålbroHouse will feature homes pre-designed and constructed that balance quality, cutting edge features and design influenced from the Swedish housing market in the Seattle, Washington community.
StålbroHouse will see to it that all materials are delivered in a timely manner insuring the quality and proper construction of the homes. These homes will be provided with unmatched levels of customer service and attention. Sales are projected to be 1,200,000 USD in year one growing to 2,100,000 USD by year two.
This business plan has been developed to obtain capital for StålbroHouse to initially ship and construct a house that will serve as the office but also to provide a spec home for future clients. It will also explain and outline StålbroHouse’s motivation and anticipated plan for the first five years. The founding entrepreneurs will each invest 100,000 USD towards the startup of StålbroHouse. The remaining amount of 118,575 USD shall be received as a short-term bank loan.
1.2 Company Presentation
StålbroHouse’s mission is to bring to Washington, new, high quality homes that are original to the area as well as the United States. There is a growing need for quality housing. Major housing developments have gone up where the quality and integrity of the homes are being compromised. Our company is dedicated to providing a hassle free living environment in which our customers can enjoy all of the benefits of a safe structure with the assurance that all materials used are of the highest quality. Many companies are solely concerned in turning a profit. It is our mission to make our customers happy. Our homes are built to last and quality will not be compromised. StålbroHouse maintains competitive market prices, while working toward expanding
will do our utmost best to work as a unified, harmonious unit focused on achieving our mission.
Our initial focus will be to buy and sell off Anebyhus homes for a profit. We are targeting two groups of potential customers. First, individual families who wish to purchase a home to construct on their land. The second group is building developers who wish to construct communities of StålbroHouse homes. All customers are required to provide their own land. We simply provide the home and guarantee the quality and integrity of the structure. StålbroHouse fosters the ideals of the importance of customer needs along with healthy relationships and a professional commitment to satisfaction.
1.3 Problem and Background
Homeownership in the U.S. is heavily pushed and thought to be linked to individuals’ self worth. Home ownership carries status and remains to be the goal for most people (Casicio, 2008). On average, it is the foremost biggest and most important purchase an individual or couple will make in their lifetime. The problem is, in a society that values homeownership, why is there such a large gap in the market in terms of quality and efficiency. There are plenty of housing companies, there isn’t however a lot of companies who build with comparable standards to Swedish homes. A home in Sweden for example requires slightly more heat than a similarly sized home in San Francisco despite the great difference in climate (Schipper, 2006). Sweden’s insulation, solid construction and other weatherization practices make the savings. Climate in the Seattle, Washington area is relatively similar to the Central/Southern regions in Sweden. Space heating is two times more efficient in Sweden than in the U.S. (Schipper, 2006) and their advancement in environmental friendliness, efficiency (in terms of the building process and heating etc.) will translate into StålbroHouse maintaining a competitive advantage.
StålbroHouse originated from one of the founding entrepreneurs personally seeing a gap in the Seattle, Washington/ U.S. housing market. Due to observations and homeownership experiences in both countries, the correlation of combining the strengths of both markets made sense, therefore starting StålbroHouse to provide a service/product for the public made sense.
1.4 Business Conception
StålbroHouse has been developed to fill a need that exists in the Seattle, Washington real estate market. According to Barringer and Ireland (2006), “Before rushing a prospective product or service into development a firm should be confident that it’s what customers want and that the product or service will have an adequate market” (p.57). To conduct a feasibility analysis, two of the founding entrepreneurs distributed a questionnaire (see appendix) while attending the Home Show in Seattle, Washington in January, 2008.
We were able to gather information that led us to believe that residents of the area really are looking for homes that are built of higher quality and standards.
1.4.1 Product and Service
StålbroHouse will sell Swedish designed homes to individual clients and developers in the Seattle, Washington area. We will offer homes from various housing companies but will initially construct a home that will serve as the company’s office from the company Anebyhus. There are numerous housing companies in Sweden all of which vary in design. We want to give our customers various housing options. Therefore we are not limited to or contractually bound to any one particular housing company. The homes we provide are designed and constructed with materials of the highest quality that far surpass U.S. building standards in terms of the materials used and building techniques. The homes will be shipped in the raw material stage pre-cut and ready to be assembled. The whole package provides the materials, windows, roofs etc. ready to be constructed at a price that can’t be met by other housing companies in the area. The purchase prices of the homes vary from 150,000 to 250,000 USD. All prices are subject to fluctuation due to environmental factors (for example currency fluctuations). StålbroHouse plays the role of the middleman between the Swedish housing suppliers and U.S. customers. We handle the orders and oversee the shipping process. StålbroHouse offers complete security of the building process. We ensure timely arrival of the materials, and the quality and safety of the materials during shipment. As the home is constructed, we are there to ensure the proper procedures
are followed. Once the home has been erected, we sign off ensuring the quality and safety of the structure. StålbroHouse will strive to serve and meet the needs of clients.
1.4.2 Target Market and Customers
StålbroHouse shall operate in Seattle, Washington servicing in addition the surrounding areas. While initial efforts focus on the Seattle, Washington area, our services are not limited to and future expansion is expected. In the first five years of operation, StålbroHouse expects to be servicing the entire state of Washington as well as areas in the neighboring state of Oregon.
We are targeting two groups of potential customers. First, developers who wish to construct communities of StålbroHouse homes and secondly, individual families who wish to purchase a home to construct on their land.
StålbroHouse will target two distinct customer segments. The largest segment that we will service is people between the ages of 25 to 55 years old who probably have families and individuals who appreciate unique design along with quality construction.
1.4.3 Management Team and Core Competence
The founding entrepreneurs are business minded and carry strong competencies in various and unique areas. The three founders are of different backgrounds and educations that integrated provide StålbroHouse with a well rounded foundation. The StålbroHouse team has direct knowledge of both the Seattle, Washington market and the Swedish market.
Sonna is the acting CEO who will also be focusing on advertising and marketing. She will also be the liaison between customers and the other founders. Johan will serve as the Director of Logistics and International Relations. He will oversee all shipments and orders placed by customers. He will act as our principal communicator between our office and Sweden since he is a native Swedish speaker. Yanko will serve as the Chief Accountant who will oversee all transactions and handling of monies.
The founding entrepreneurs all have educations and backgrounds in the areas they will be managing. This will ensure the simplicity and accuracy of all transactions.
1.4.4 Key Success Factors
1. Safe, quality housing that provides innovative design at competitive prices. 2. Homes of this quality are quite costly and are considered to be custom built.
StålbroHouse will afford its customers the same quality at a fraction of the cost. 3. To ensure quality products are being used in the construction of your home
requires expensive on-site supervisors. We give people the option to obtain a beautiful home where the worries of poor craftsmanship are eliminated.
4. We offer unique materials in the construction of our homes. Roofing materials are unique to the area and are an aesthetic component to the overall look of our homes.
5. Maintaining open communication between StålbroHouse and its customers in order to ensure the highest level of customer satisfaction and building a positive reputation for the company and its products.
6. To increase the number of sales, while also increasing the level of profits for both StålbroHouse and its investors.
7. The more StålbroHouse homes that are built, the more (free word of mouth) marketing the company will receive. We are confident the uniqueness of the homes will sell themselves.
1.4.5 Business Process
StålbroHouse falls under the SME umbrella and will be created as a Limited Liability Company based out of Seattle, Washington. It will be owned by its principal investors Johan Stålbro, Sonna Stålbro and Yanko Todorov.
StålbroHouse operates in the indirect channel for the companies producing the homes. The distribution strategy of StålbroHouse is clear and straight forward. When a customer has placed an order for a home, we place the order to the supplying
where the materials will be shipped to the port of Tacoma in Washington through DHL (Full Container Load) shipping services. We handle all the shipping and customs paperwork/ procedures. When the materials arrive, after the clearing of customs, materials will then be driven to the construction site of the purchasing customer. At this time, we will conduct the inspection of all materials ensuring the integrity of materials have not been compromised during shipment.
1.4.6 Pricing strategy
To generate sales the first year, StålbroHouse will primarily focus their efforts on advertising and marketing issues. We need to get our name out there and educate people on what we are offering and what our advantages are. We need to get potential customers to realize the benefits that come with purchasing a home of Swedish quality (Daws, 1996). As already mentioned, a home will be built to serve as both the office and as a “spec home” to provide an example to potential buyers that will demonstrate the quality of the materials that are used in this line of housing. This will draw attention in the community as well as allow interested customers to see first hand the difference in design and quality our homes offer. We want people to see that this brand of housing (imported from Sweden) exceeds typical housing standards currently offered in the area. Sweden has a reputation for their forward thinking in design and innovation. We are providing a line of houses that won’t look like every other neighborhood in Washington.
Catalogues will provide different house designs as well as floor plans etc. Once a home is purchased, 25% of the homes cost will be due (materials will be shipped from Sweden), when the materials have arrived another 50% will be paid and the final 25% will be due upon completion.
Due to extremely high prices in the Seattle, Washington housing market, our prices despite exporting costs are able to remain relatively low for what you get. According to Rhodes (2008), the average medium priced home in the greater Seattle area is around 447,800 USD (The Seattle Times). The homes we provide are by far superior in quality in comparison to homes in the same price margins. The average cost of a StålbroHouse home is in the price range of an average middle class Seattle,
Washington resident (62,000 USD) (CityTownInfo). Housing prices in Sweden are significantly lower on average than homes in the Seattle, Washington area. The average price of a detached house in Sweden is estimated around 233,333 USD (The Local, 2005). This will allow us to maintain a large profit margin for our survival. The cost of a StålbroHouse home ranges from 150,000 to 250,000 USD (prices vary on home). Since we are selling homes from Swedish suppliers, all prices are subject to change. However, we will work to keep costs down and continually research avenues that would enable us to cut costs even further.
1.4.7 Financial Forecast
The financial forecast of StålbroHouse is a promising representation of the company’s ability to be profitable even in its first year of operation. Sales in the first year will allow the company to repay the loan.
Table 1.1: Financial forecast extract for the first 5 years
Year Year 1 Year 2 Year 3 Year 4 Year 5
All numbers in USD Total Turnover 1,200,000.00 2,100,000.00 3,800,000.00 6,600,000.00 12,200,000.00 COGS 750,000.00 1,650,000.00 3,000,000.00 5,250,000.00 9,750,000.00 Gross Profit 450,000.00 450,000.00 800,000.00 1,350,000.00 2,450,000.00 Earnings Before Tax 305,313.75 233,040.00 412,960.00 682,810.00 1,222,510.00 Tax 76,328.44 65,251.20 136,276.80 225,327.30 427,878.50 Earnings After Tax 228,985.31 167,788.80 276,683.20 457,482.70 794,631.50 Loan Repaid 118,575.00 Surplus/Deficit 110,410.31 167,788.80 276,683.20 457,482.70 794,631.50
2. Opportunity Recognition
2.1 Current situation in Washington State’s Real Estate Market
Washington has been ranked as one of the top places to live in the U.S. The economy as a whole is steady with above average job and population growth. These factors have contributed to the state’s “strong home-price gains” (Less, 2006). According to CNNMoney.com, price growth in the housing sector has decreased significantly in most areas around the U.S. However, home values are reaching an all time high in the state of Washington (2006). Washington State also possesses the capabilities to maintain steady growth. Neighboring markets (California) have experienced prices that were not economically sustainable. “Although price growth has been steady in Washington, it has not been outstripping the economic fundamentals” (Less, 2006). The director of John L. Scott real estate has said that recently it was incredibly low mortgage rates that were driving the prices and success of the market. Now, Washington State is experiencing significant job growth in the region and this will continue to drive prices. With companies like Microsoft and Boeing who have announced significant hiring’s to be held in the future, the area doesn’t pose to be a problem in the near future in terms of downturn in the real estate market (Less, 2006).
Homeownership rates in Washington are amongst some of the lowest in the U.S. with just 64 percent. According to Barb Lally, of the Washington Realtors Association, this number is expected to change. “A strengthening job market could lead renters to start buying” (Less, 2006). Washington’s population growth is also twice the national average.
A recent report written by Richard Davis, president of the Washington Research Council has said, “much of the population growth consists of people with means…. those moving to our state tend to be well-educated, higher-income professionals which add to market pressures by bidding up the price of available housing” (Less, 2006). Washington also draws in more domestic migration than they lose to other states. If Washington’s fundamentals remain in tact, there should be no reason the market shouldn’t continue to outperform most areas in the U.S. (Less, 2006).
2.1.1 Prices and Factors affecting the Market
The U.S. economy as a whole is experiencing an economic slowdown at the moment. While some areas are being affected more than others, many industries have seen a decrease in sales. The real estate market has been affected as well. The U.S.’s GDP ranges from 43,500 USD per capita (www.indexmundi.com). Soaring oil prices starting in 2005 – present threaten inflation and unemployment. Yet the economy in some areas managed to stabilize through the years – end 2007 (www.cia.gov).
The United States GDP purchasing power parity has been estimated to 12.31 trillion USD for the year 2006, and 13.13 trillion USD for the year 2007 (www.indexmundi.com).
The U.S. GDP by sector for 2006 has been estimated to: Agriculture 0.9%
Industry 20.4% Services 78.6%
Since 1975, the gains in household income have gone up by 20%. The GDP’s – real growth rate has been decreased by 3.20% in 2006, with 27.27% down from the previous year with 3.20% remaining for 2007.
Year
GDP
-
real
growth rate
Rank
Percent
Change
Date
of
Information
2003 2.45 %
115
2002 est.
2004 3.10 %
104
26.53 %
2003 est.
2005 4.40 %
100
41.94 %
2004 est.
2006 3.20 %
138
-27.27 %
2005 est.
2007 3.20 %
152
0.00 %
2006 est.
Table 2.1: U.S. GDP real growth rate.
Graph 2.1: Exponential growth of GDP and the U.S. Housing Valuation in trillions USD.
Source: Federal Reserve Statistical Release, 2008.
The real estate market in the U.S. has affected most areas around the country. According to Moody (2007), despite the highly inflated market, the purchase of a home still pans out to be money well spent by the 11th year of mortgage payments.
This is due to the fact that annual home appreciation is around 2% and the annual rent increase is around 4% (New York Times).
According to Goldman Sachs (2008), the United States is going through a “garden variety” housing downturn that will involve a sharp slowing in overall economic growth. There will be a sluggish recovery that equity markets will nevertheless sniff out ahead of time (Financial Post). U.S. equity prices have been rising amidst the initial price bust and acknowledgement of the situation has only begun to occur a year after the burst began in late 2006. U.S. home prices are expected to drop by as much as 9% during 2008. Market analysts have estimated that even individuals with the best of credit scores will face the challenge of keeping up with their mortgage payments. JPMorgan has reported a 50% drop in net income, worth 5.1 billion USD
in write-down’s and loans (loss reserves linked to home loans, mortgages, etc.) in 2007. From January to the end of April 2008, the fourth largest U.S. bank Wachovia Corporation reported a loss of 393 million USD, which was caused by poor lending practices in the state of California. In the first quarter of 2008, the median price for a single family home dropped by 1.8% to the amount of 217,900 USD. According to Yun (2008), this is the first national price drop since the Great Depression (www.bloomberg.com).
Many families are struggling to find housing prices affordable under the constraints of their salaries. In other words, average salaries need to be better aligned to current costs of living. Financial advisors recommend people stay with mortgages that require only a third of one’s monthly paycheck.
Table 2.2: Historical Inflation rate in USA
Source: www.InflationData.com.
According to Business Week magazine (2004), today’s real estate prices are predicated on an impossible combination: strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. The result will be: either the economy’s long-term prospects will get worse or rates will rise. In either case, the housing market will weaken.
Regardless of the bleak outlook presented above, the American Dream is deeply rooted and will remain a top priority for most. Homeownership is tied to an individuals self worth. Current conditions are simply making loan repayment more
difficult for some. When it comes to real estate, many people struggle to know when and if there is a better time to buy. Forty of the largest metros in the U.S. have yet to hit the bottom in terms of price. According to the National Association of Realtors (2008), Seattle was said to have hit the bottom in the first quarter of 2006. Since that time, prices have risen 12.3% (www.forbes.com). The most recent state revenue forecast revealed, “Washington’s economy is still strong and outperforming the national economy” (UW State Relations, 2007). Washington ranks below the national average for property taxes, ranging around $30.60 per $1,000 of personal income in Fiscal Year 2005. This places Washington 28th nationally (UW State Relations, 2007). According to Dr. Chang (2007) the state’s chief economist, “Washington’s economy continues to outperform the U.S. economy, particularly in the areas of construction and real estate. Washington continues to show strong employment growth” (UW State Relations). In addition, “Seattle, Washington has a booming housing market and high-tech industry. There is also no state income tax, allowing people and companies to make an increase of 5 to 10% more” (Orman, 2007).
The weak dollar has made the U.S. real estate market quite attractive for both foreign investors as well as individuals who were waiting to see prices come down. According to the Association of Foreign Investors (2008), with in the U.S. market the top five cities foreign investors preferred to buy property in is New York, Washington D.C., Los Angeles, San Francisco and Seattle (Business Week). According to the same survey, the U.S. is ranked number one for being the most stable and secure country in terms of real estate investments followed by Germany, the United Kingdom, Australia and Japan. Prices in the U.S. vary greatly from state to state and city to city. Prices also depend on the type of house you purchase. The company we see being our main competitor is Lindal Homes whose average price is around 450,000 USD (www.lindal.com).
2.1.2 Technological Development
In the last two decades, the U.S. construction industry has made attempts to no longer solely build on-site. The advantages of building in a factory controlled environment are overwhelming in its ability to cut costs as well as utilize materials more efficiently to cut back on wasted materials. In 1990, factory-built homes accounted for only
25% of single-family homes in the U.S. whereas more than 90% of all single-family homes were factory built in Sweden.
Exporting factory built homes could be the ultimate value-added export strategy; hence the importance in understanding factory-built or "componentized" construction (www.cintrafor.org - Fact Sheet #9).
Factory built systems in the U.S. can be characterized in three groups:
1. Open panel systems, including pre-cut homes with interlocking timbers and open panel homes with exterior siding attached to wooden frames.
2. Closed panel systems which are stressed-skin panels with interior and exterior wall coverings already attached that also include factory-installed doors and windows.
3. Three-dimensional systems, which include modular and manufactured homes nearly completed in the factory (www.cintrafor.org - Fact Sheet #9).
The benefits of producing homes in a controlled factory environment allows contractors to save on time (the time it takes to assemble the home on site), which decreases labor costs and also measurements are more exact which decreases the amount of materials that are wasted. This also keeps costs down and is better for the environment. The integrity of construction can be more accurately monitored and typically products used are of higher quality. These are the characteristics of Swedish prefabricated homes. However, prefabricated homes produced in the U.S. have the reputation for being of lower quality and in no way resemble the look of a real home. Therefore, the term prefabricated carries a negative connotation (Hedges, 2008). With the technology we have today, there is no reason the construction industry shouldn’t take more interest in “Green” building. The way we build our homes, both in design and choice of materials are some of the ways that we can affect our own future. We should be concerned with how much energy it took to produce our homes and how much energy we will consume living in it.
Twenty-two percent of the United States’ total consumption of energy is consumed in homes. Producers of these homes pay very little attention to the operating costs and
the buyers are solely concerned with the purchase price (Nilsson, 2006). A situation like this makes it very difficult for changes to be made in the way most Americans operate. “An intervention here will increase the overall efficiency of the economy” (Nilsson, 2006).
Graph 2.2: States with competitive green power offerings.
Source: The National Laboratory for the U.S. Department of Energy Efficiency & Renewable Energy.
2.2 Current Situation in the Swedish Market
Sweden is one of the most transparent and most liquid real estate investment markets, recognized for its professionalism and investor-friendly business practices within the whole of Europe. 2007 marked another record year in terms of total market turnover. Since 1990, the monetary and fiscal policies of Sweden have succeeded in their attempt to maintain a macroeconomic environment conducive to solid, sustainable growth. Strict government spending limits have been imposed under parliamentary control, which caused the current account surplus to run at 7 percent of Sweden’s GDP. Inflation rates over the past five years have been among the lowest of all EU countries. International surveys consistently recognize Sweden for their efficiency in their infrastructure and public sectors. The Swedish economy has in the last few
years been in an expansionary phase driven by an overall surge in exports, consumption and investment. Their GDP growth slowed from 4.1 percent in 2006 to 2.7 percent in 2007. The economy is expected to perform well over the next couple of years with growth rates at 3.0 percent in 2008 and 2.8 percent in 2009. 2007 has also brought about a major upturn in employment while inflation remains low. According to Katrine Hupfauer, Head of Acquisitions and Sales at Real Estate International, from a macro economic perspective, Sweden is a stable country whose standard of living is high along with strong purchasing power (ISA Real Estate report, 2008).
Graph 2.3: Annual Inflation Percentage Rate 2003-2007.
Source: ISA 2008 report
Graph 2.4: GDP growth, annual average in percent, 2002-2006
The Global Competitiveness Report from 2007 and the World Economic Forum (WEF) ranked Sweden as the fourth most competitive country in the world. WEF’s Growth Competitiveness Index aims to estimate the ability of the world’s economies to achieve sustained economic growth long term. The OECD and the World Bank have confirmed Sweden’s competitiveness in other studies (ISA Real Estate Report, 2008).
Graph 2.5: The world’s most competitive countries, Ranking 2007
Source: ISA 2008 report
There are several elements that factor into Sweden’s ability to achieve such high results in their real estate market. Transparency is one of the highest in the world, due to their openness in public property records, a highly evolved legal system and the abundance of accessible market information. Investment performance indexes are also in a superior place. Market transparency, the reliability of the legal system and common use of standardized documentation coincide to reduce transaction costs (ISA Real Estate Report, 2008). Sweden also enforces strict building codes and has already implemented the European Commission directive 2002/9I/EC regarding energy performance and effectiveness. The EC directive has been in force since 2006 and essentially means that buildings need to be rated for their energy performance. The Swedish government has allocated a large amount of funds to encourage further development of “Green” building practices (ISA Real Estate Report, 2008).
“Sweden has moved to the forefront of the world’s “green” nations by setting an ambitious goal to achieve a completely oil-free economy by 2020—and without building more nuclear power plants” (West, 2008). This goal, regardless of it being highly ambitious will entail even further development within the housing/building industry in regards to eco friendly construction.
Graph 2.6 Real Estate transparency index–Europe, the Middle East and Africa, 2006
Source: ISA 2008 report
When comparing the number of residential properties sold in Sweden, the number of residential homes is not that high. The last few years have posed a threat to the future demand of residential homes. There are many companies in the Swedish market that produce factory built homes – Anebyhus, Ekeforshus, Trivselhus, Kungshus, Savsjohus etc. They are superior in quality and prices in comparison to other European or U.S. firms. According to Sweden’s Statistikacentralbyran (2008), house sales are lower than they were in the early 70’s. Sweden’s population is estimated around 9 million which means the market is ultimately limited. Some companies have already realized the need to look outside of Sweden and extended their market to the rest of Scandinavia along with Germany, the UK, Holland and Switzerland.
Graph 2.7:Bureau of Statistics – number of houses sold
Source: Statistikacentralbyran Sweden
2.3 Opportunity Gap
In highly competitive and homogeneous markets, competitive moves are quickly copied which means the skill and commitment of personnel to provide the ultimate source of differentiation and competitive advantage is crucial. Finding and exploiting an opportunity gap has never been easy. A new idea might be taken as an opportunity if there is a gap between current market conditions and the possibility to create something new or improve an already existing product or service (Barringer & Ireland, 2007). Barringer and Ireland (2007) use four superiorities to help identify business opportunities (superiority, uniqueness, protection, ethicality, readiness), to determine if a product or service will create or add value to society. The best opportunities often arise from an entrepreneur identifying a need for a product or service that they personally wish to have. Selecting the richest areas of opportunity from a long list of desired outcomes is critical since chasing after less promising ones drains resources. Ulwick (2002) recommends the formula [Importance + (Importance – Satisfaction) = Opportunity] to yield highly accurate results in finding the most promising areas.
In line with Barringer and Ireland’s thinking, the gap in the market we found was identified by one of the founding entrepreneur’s personal desire to own a home of higher quality than what the U.S. housing market currently offers. Prefabricated homes in the U.S. are not comparable to Sweden’s prefabricated homes. Therefore we are forced to make the comparison based off of the U.S.’s site-built homes. Both
the U.S. and Swedish companies guarantee their homes, however these standards vary in levels of quality. Newly constructed homes are environmentally friendly which adds additional value. They are designed to incorporate “green” healthy living standards that will stand the test of time.
Sweden’s advantage in “building green” is in their ability to produce raw materials using less energy per ton than the U.S. The installation of new and modern equipment and their use of heat recovery techniques allow them to cut down on the amounts of energy used to normally produce such materials like in the U.S.
Sweden’s space heating is also twice as efficient as in the United States. For example, “a home in Sweden requires only slightly more heat than a similar sized home in San Francisco, despite their great differences in climate. Insulation, solid construction and other weatherization practices make the savings” (Nilsson, 2006). Regardless of peoples desire to push Americans towards more eco-friendly living environments such as increased urban dwellings, “Single Family homeownership remains in the USA to be a goal for most people” (Cascio, 2008). Meaning that success for most Americans is displayed most through home ownership. Therefore, it is far more beneficial for environmentalists to focus on improving the efficiency of American homes rather than trying to restructure and reform a culture.
One more example of Sweden’s superiority in housing standards is in their degree of automation. Automation in Sweden is generally based on two-dimensional construction because it is easiest for automated machines to construct components in two’s, rather than three dimensions. In Swedish computerized wail framing assembly lines, the computer feeds structural components, moves the assembled frame forward via conveyors, determines wall lengths, provides information on the size and locations of windows and doors, cuts and installs insulation, squares the wall frame, and turns the wall 180 degrees for drywall application. Control of these major steps in the home component building process is more developed in Sweden than in the U.S. Once components arrive at a building site, a crew can normally finish enclosing the shell of an average sized (1,400 square foot) house in one day (www.cintrafor.org - Fact Sheet #9). Swedish technology is able to reduce construction costs by 27% over the traditional U.S. residential construction methods. An average site-built home in the
typical Swedish closed wail panel house. The panel system will also allow for optimal shipping abilities and utilize container space by shipping solid walls with a minimum of wasted space. This will keep freight costs down when shipping homes to the U.S. (www.cintrafor.org - Fact Sheet #9).
Sweden’s building codes fall under what is deemed as “The Universal Code” which in comparison to the U.S. is much more rigorous in its requirements. Sweden’s government has invested nearly a billion dollars to further promote and push energy conservation in the form of government grants. Which in comparison to the U.S. (which obviously has the capacity to fund much larger amounts), has failed to even come close to the amount of money that is tappable for conservation.
Sweden’s building practices, which are far more efficient and eco-friendly, are of the normal requirements. In opposition, Sweden’s rigid requirements are extremely high to what is expected in the U.S. While there have been a few companies that have taken strides to improve the quality and efficiency of homes, they are tacking on an extremely hefty price tag making the average middle class family unable to afford such endeavors. Swedish prefabricated homes far surpass quality, efficiency, and detail, and are fairly priced so that middle class families can afford to purchase them. Customization is a major issue for customers when it comes to building a home. Customization allows homes to look unique. This can include custom architecture and floor plans, interior trim, carpeting, appliances, etc. Two-dimensional factory building systems used in the construction of Swedish homes allow modifications to be made so that customers have more freedom in the design and layout of their home. The integration of computer technology in factory home manufacturing is limited in the U.S. because of the low degree of flexibility that currently exists in their factory assembly process. (www.cintrafor.org - Fact Sheet #9).
We are benefiting by taking homes from a market that has low inflation rates and selling in an extremely inflated market. According to Håkan Säll, real-estate agent for Mäklarringen, Sweden’s housing market is the least inflated market in Europe (2008). In contrast, the U.S. consists of areas that include some of the largest inflated markets in the world. We will benefit from importing homes from this market because their low prices along with lower operational expenses guarantees our ability to keep prices
at an affordable level to be able to attract the average Seattle, Washington resident. In addition, our profit margin will be able to remain at a high level.
People in the United States pay a lot of money for homes that are low in quality, are inefficient and lack long term sustainability. Sweden however, has better regulations that require contractors to give homeowners the quality they deserve and pay for. We will meet these needs by bringing people homes that are friendly to the environment, unique in design and offer unsurpassed quality in terms of construction and aesthetics that can’t be found in the United States at these prices.
3. Attracting Financial Resources
Starting up a business often requires a certain amount of equity in order to attract outside investment. Since it is necessary for most startup’s to seek outside capital, understanding the elements financial lenders want to see in a well-written business plan is to their advantage. In the following chapter, we will present three different sources of capital according to theory. We will discuss the advantages and disadvantages each one carries and explain the financial source we prefer that we feel fits best with the startup of StålbroHouse. General information about the essential elements of a business plan will be presented.
3.1 Potential Investors
Three major types of investors will be presented in the following section and their preferences for investment in new ventures firms. Based on theory and our intuition, we arrived with a preferred investor in regards to StålbroHouse.
3.1.1 Banks
Banks are well known for providing financial capital in the form of loans to customers that vary from well-established firms to small startups. Banks are considered to be conservative lenders and loans are typically quite competitive in terms of qualifications (Bettignies & Brander, 2005). In comparison to venture capitalists, bank loans are typically favored for their lack of involvement in the company and ownership rights. Banks for the most part are solely interested in a company’s ability to repay the interest and principal of the loan. In the past, loans were granted on the banker’s personal knowledge of a customer. However, today granting credit from a bank is highly regulated. There are several techniques and systems banks use to measure the risk they are taking when lending capital to firms. The most common method was presented in 2005 by the Basel Committee to provide bank supervision. It is called the Basel II – International Convergence of Capital Standards. The method is not mandatory but recommended to help prevent banks from falling into high risk agreements (loans) and provides information about the treatment of Double Default Effects (www.bis.org).
Another element that can demonstrate one’s ability to repay the loan and the interest is an individual(s) credit history. To estimate the credit risk, banks will look at the individuals credit score. FICO scores were developed by Fair and Issac to gather information from credit report agencies. This is the most widely used credit score within the USA and has the ability to impact one’s chances to qualify for various credits. More information about credit scoring can be found online at www.myfico.com (Pinson, 2005). Other well-known and highly trusted sources are Equifax Credit Information Services, Trans Union, LLC, Experian Consumer Credit Services, Dunn & Bradstreet Business Information Reports, and Experian Business Profile Reports.
Banks will provide credit to companies who meet the requirements outlined by their regulatory estimating tools such as Basel II, and ones personal credit history etc. Firms that do not meet these requirements need to consider other capital sources – venture capitalists or business angels (Vance, 2005). Already existing companies will submit financial statements, profit & loss statements, balance sheets, and tax returns from previous years. New businesses like StålbroHouse should be treated in a different way. A personal financial history of owners will be examined. The owners will be required to submit personal balance sheets listing their assets and personal tax return statements may be required. The owners might be required to use their houses and other liquid assets and investments that qualify as collateral (Linda Pinson 2005). Collateral is evaluated at a liquidity rate and banks will establish the order of their rights to claim and sell the collateral of borrowers upon the default of payments. The amount and type of collateral owners provide, demonstrates their commitment to the success of their company and removes risk on the side of the bank (Pinson, 2005). Banks hold the deposits of many civil people and firms as well, that is why they are of great importance to a country’s economy. Bankers are looking to reduce risk continuously. Banks will charge individuals and firms interest which is calculated as a percentage of the principal, this percentage is determined by current market conditions and the level of risk involved in the loan requested (Barrow, 1995).
In order to grant the credit requested, a firm must be able to demonstrate its ability to repay the loan plus the interest for the period of the loan. In addition, the firm needs to be able to maintain a positive cash flow that will allow business to operate in the
future. If the loan requests assets, the asset to be financed must last as long as the loan period for it would generate repayment of funds. If the purpose of the loan is to increase working capital, banks will be interested in seeing that the loan plus interest can be repaid through liquidity during the following years (Pinson, 2005).
3.1.2 Venture Capitalists
Venture capitalists are individuals or companies that invest money in new or already existing but expanding firms. They are known to invest in big portfolios where one or just a few firms are highly successful and those few are providing financial support to others within the portfolio. Therefore, Venture Capitalists are known as high-risk investors (Shepherd & Douglas, 1999). To lower the risk, they prefer to invest in new businesses in cooperation with another venture capitalist.
Venture capitalists invest in shares and become shared owners of the company. In certain cases they might solely lend money, but this often requires a high interest rate (Henricks & Riddle, 2002). Venture capitalists make significant managerial contributions to the firm. Some of the benefits are managerial inputs, expertise within the field, personal contacts and experience etc. Venture capitalists are usually working on a few sectors that they are familiar with, so they can make accurate assumptions on the future success of the company. On the other hand, acquiring a Venture Capitalist can mean a double hazard. The managerial input that Venture Capitalists provide might weaken the entrepreneur’s incentive to put forth effort. In addition, confidential information about a company project can be compromised when working with a venture capitalist which is why many prefer to work with banks that are willing to sign confidentiality agreements. A financial agreement might be reached, depending in part on the potential adverse selection problem. When negotiating with a Venture Capitalist, the Venture Capitalist learns the entrepreneur's private information and is potentially able to expropriate the project in the future (Bettignies & Brander, 2005).
Before Venture Capitalists are willing to invest in new businesses, exit strategies are determined. They need to see where the business is ultimately heading. They want to see that there is the potential for high profits, a great level of competitiveness and market sustainability. A financial plan that shows the direction the firm will be
heading in, how they will reach their goals and the methods they will use to generate profits needs to be concise and well researched. Being equity partners, Venture Capitalists have a say in the way firms are managed and operated. Presenting a strong management team can be the hardest task to satisfy investors because they put their own funds in their hands (Pinson, 2005).
3.1.3 Business Angels
Business angels are considered informal investors who normally invest with their own funds, whereas other investors manage the pooled funds of others. Business angels often fund firms that haven’t been able to get funds from banks or Venture Capitalists. Business Angels tend to be more willing to take on high risk partnerships. Bare in mind however, there willingness to do so usually means they will retain a large portion of the firms return on investment. A large percentage of business angel investments are completely lost when new businesses fail, therefore professional business angel investors seek investments that show the potential of a return at least ten times or greater than their initial investment within the first five years. In addition, an exit strategy, possible acquisition plans or possible public offerings are researched. Many business angels are former entrepreneurs, therefore they are familiar with the process startups will go through, management challenges and have knowledge of exit strategies. Their input is invaluable and can aid in firms managerial practices (Henricks & Riddle, 2002).
What a business angel is looking for when it comes to investment is quite different is comparison to the other two sources of capital. Business angels invest in a company because they like and believe in the founder(s) and the business idea.
3.1.4 Preferred Lender
Taking into consideration the implications the three financial investors carry, we have decided that obtaining a bank loan will be the most appropriate means of investment for our business. We would like to avoid the double moral hazard with Venture Capitalists and refrain from giving out confidential information that could be
have been helpful, we felt the risk didn’t outweigh the benefits. We are confident in our abilities to set up and develop this business. StålbroHouse has an advantage in its management team. The founding entrepreneurs carry expertise in an array of areas all of which will assist in the company’s ability to succeed.
We are confident that StålbroHouse fulfills the necessary requirements to obtain a bank loan. The founding entrepreneurs have clear and positive credit scores, the conception of the business is clear and the company’s strategy is simple and well researched. Our financial forecast shows aggressive expansion during the next few years and our cash flow will remain positive. The investment will be secure in that the loan will serve to finance the purchase of land where we will build a house that will also serve as the company’s office. If there were to be a need to terminate the business, the property and house would serve as collateral. We will not be purchasing property to sell at a later stage. We are in essence the middleman between housing manufacturers in Sweden and customers in the U.S. who wish to purchase a home. In layman’s terms, we are the contact between two parties. We sell Swedish housing companies products upon the request of a customer.
3.2 Role of a Business Plan
A coherent, professionally minded business plan serves to explain to investors the company’s strategy to successfully operate and generate profits. It will also provide a path to finding capital for new businesses and already existing firms. In addition to providing a guide, businesses can also use the plan as a form of documentation that demonstrates a company’s credit standing as well as possibilities for future international expansion.
A business plan essentially creates a guide that firms can refer back to in later stages to monitor the alignment of their strategy from its core purpose. A business plan provides us with the tools needed to analyze and implement changes that will affect our business in a positive manner and will turn it into a more profitable one. A business plan provides detailed information on the various aspects of a firm (Pinson, 2005). Writing a business plan allows companies to make their mistakes on paper so they are able to avoid actually making them in the marketplace. Once written, the
plan allows owners to feel more confident about their ability to set up and run the firm.
Our business plan will be of great assistance to us when we seek financing for the start up of StålbroHouse. It demonstrates in detail the desired type of investment and how it will further the firms ability to reach its goals and increase profits. Providing explicit details concerning how the money will be spent, figures containing solid information such as industry norms, rate sheets, estimates, etc. will be used to satisfy lenders or investors and convince them to invest in our venture.
A business plan also assists firms in demonstrating their ability to venture out into international markets. It can contribute to the evaluation of a firm’s business potential in a foreign marketplace. The development of a business plan presents possible ways in which a business can compete within the global economy (Pinson, 2005).
There are typically three types of business plans: a Summary business plan (10-15 pages), a Full business plan (25-35 pages) and an Operational business plan (between 40 and 100 pages). The average length should be from 30 to 40 pages which includes the necessary supportive documentation (Pinson, 2005). However, there is no set length to a business plan since the need for different information varies from company to company. The plan presented will be of the second type – a Full business plan of StålbroHouse.
4. REAL ESTATE INDUSTRY ANALYSIS
4.1 Real Estate Industry Description
There are many elements that factor into the analysis of an industry. Growing industries are usually more open to new products and services. According to Barringer and Ireland (2006), the feasibility of any product or service is contingent upon the attractiveness of the industry in question. Venture capitalists will typically want to see an assessment of the industry before investing in a new venture.
Barringer and Ireland (2006) list the following characteristics as attributes of attractive industries (p.61):
• Being large and growing (growth potential being more important).
• Being important to the customer. Products or services that customers “must have” rather than “would like” to have.
• Young markets, price competition is usually not as intense.
• Having high rather than low operating margins. These markets are simply more profitable for entry and competition purposes.
• Not being crowded. A crowded market, with lots of competitors, is typically characterized by fierce price competition and low operating margins.
The primary data for the industry analysis was collected by researching the existing housing companies currently offered in the area. Their construction techniques and standards along with a feasibility survey that was distributed to residents of the Seattle area allowed StålbroHouse to further distinguish its strengths and get a feeling for what individuals feel is missing in the homes currently provided in the market. This approach allowed StålbroHouse to assess the overall attractiveness of the industry to determine whether their product was feasible or not (Barringer, Ireland, 2006).
4.2 Potential Customers
With population figures nearing 7 million and growth rates that are amongst the highest in the country, Washington’s housing need is expected to increase (Less, 2006). In addition, job growth rates have also been amongst the highest in the
country which is bringing many new professionals to the area.
There is a growing trend in people caring more about how their homes are being built. This is to StålbroHouse’s benefit for the company’s niche is providing its customers with higher standards of construction.
We are targeting two groups of potential customers. First, developers who wish to construct communities of StålbroHouse homes and secondly, individual families who wish to purchase a home to construct on their land. StålbroHouse will target two distinct customer segments. The largest segment that we will service is people between the ages of 25 to 55 years old who probably have families and individuals who appreciate unique design along with quality construction.
The housing industry is a rather competitive environment. Developers want to slap up homes quickly. The amount of time it takes to complete a home determines the amount of capital they will receive in the final sale. They are making payments on the interest of the loan until the property is sold. Thus, the reason they want to quickly finish and sell off the property. StålbroHouse will appeal to developers in this way because our prefabricated homes cut back on time and money. Once components arrive at a building site, a crew can normally finish enclosing the shell of an average sized (1,400 square foot) house in one day (www.cintrafor.org - Fact Sheet #9). Swedish technology is able to reduce construction costs by 27% over the traditional U.S. residential construction methods. An average site-built home in the U.S. is estimated to use about 1,074 labor hours, compared to 533 hours for the typical Swedish closed wail panel house.
4.3 Potential Competitors
The number of companies in Washington’s housing industry is among the thousands. There are so many small independent contracting firms to corporate development firms. Our main competition will be with larger sized firms for they do have the ability (capital) to research and copy efficient building techniques that gain momentum and popularity. A few of the leading companies in the area are, Buchan Homes, Braaten Construction, Lindal Cedar Homes and Northwest Design.
Barringer and Ireland (2006) point out that market profitability is determined on the level of competition that exists. There needs to be enough differences in one’s product or service if entering a market with stiff competition. StålbroHouse maintains unique characteristics that are original to the area. We are able to offer customers price points that are feasible for the average middle class family. In addition, the homes have elements that would be next to impossible to replicate in a cost-effective manor giving us an advantage (Hedges, 2008).
The company is able to maintain large profits with out the pressure to compete with market giants.
5. Entrepreneurial Orientation
Companies striving to succeed and establish high levels of corporate entrepreneurship need to have an entrepreneurial orientation (EO). Corporate entrepreneurship is generally focused on creating new venture opportunities, strategy renewal, and venture development (Dess, Limpkin, 2005). Entrepreneurial orientation refers to the strategy practices companies use to launch and develop corporate ventures, therefore we assume that it fosters entrepreneurial growth. According to Wiklund and Shepherd (2003), entrepreneurial orientation mediates the company’s knowledge and performance. Being more entrepreneurial increases a company’s chance at success and expansion.
Entrepreneurial Orientation is defined as the mixture of five main elements: risk-taking, innovativeness, proactiveness, competitive aggressiveness, and autonomy (Hughes, Morgan, 2007). Mostly importantly, entrepreneurial orientation will depend on the size of the firm, its age, politics, and values.
The size and age of the company is positively correlated to its EO. According to Hughes and Morgan (2007), the business environment is quite uncertain. In competitive environments, EO plays an important role in start-up firms. EO is a tool that helps start-ups compete with already established companies. Young companies that exhibit high levels of innovativeness and risk taking usually encourage EO, whereas older and larger firms typically require more autonomy to be able to influence changes in performance (Hughes, Morgan, 2007).
Dickson (2004) in his research of SME’s came to the following conclusion, larger SME’s with stronger financial performance and with greater export intensity are more entrepreneurially oriented. The environment can also determine the importance of EO. EO becomes more important for companies that are operating in more attractive, risky, and unpredictable markets with a higher-level of technology (Dickson, 2004, p.5).
