MODULE 4: PRODUCT DEVELOPMENT, OPERATIONS, AND FINANCIAL PLAN

Fundamentals of Product Development

Product Development is the process of developing, testing, and commercializing a product or service with the
ultimate objective of solving the problem of the primary target market. It is composed of four sequential steps: 1.
Developing a product or service description, 2. Creating a prototype, 3. Testing the prototype, and 4. Validating the
market.

Product or Service Description

It simply describes how a product or service works and how it benefits the customers.
1. It should directly address the primary target market in personal manner using everyday language.
2. It should highlight the features that will cater to the customer’s needs or address the customer’s problems.
3. Realistic superlatives should be used for the product description.

Creating a Prototype of the Product or Service

Prototype is a preliminary model or sample of a new product or service that is created to test a product concept or
service process.
According to Entrepreneur (www.entrepreneur.com), creating a prototype lessens
implementation/commercialization risks and provides the entrepreneur a bunch of advantages as follows:
1. creating a prototype enables the entrepreneur to engage in trial-and-error, provides room for improvement, and
refines the functionality of the product design or service process.
2. creating a prototype provides the entrepreneur a window to test the performance and specifications of various
materials and service processes.
3. A prototype helps the entrepreneur effectively describe the product or service to the product team.
4. Creating a prototype elicits respect from key stakeholders and customers.

Testing the Prototype

It is mandatory to ensure that the product or service will not fail the customers and will deliver its definitive purpose.
This will elicit customer satisfaction and, eventually, customer loyalty and retention.

1. Focus group discussion

2. Legality and ethical test
3. Safety test
4. Product costing test
5. Component test
6. Competitors’ product/service test

Validation of Market Acceptability

a process of finding out if the intended primary target will be buying the product or availing the service.

Market Acceptability is a critical factor that the entrepreneur must validate before launching the product or service,
because this can strongly suggest if the business will be successful or not.

The following objective questions are more likely to be answered in the whole process of market acceptability
validation:
1. Will the primary target market like the product or service?
2. Wil the primary target market buy the product or service when it is already in the market?

These questions can easily be answered if the entrepreneur will perform the following activities:
1. Use the most strategic marketing research tool (FGD, survey, observation, interview, online survey, e-mail, or a
combination of these research tools).
2. Prepare relevant open-ended questions that answer the objectives above.
3. Find market experts who also target the same market but are not directly competing with the entrepreneur.
4. Collate all the data, analyze them, and prepare a summative report that answers the objective questions.
The 4Ms of Operations (methods, manpower, machines, and materials)

 METHODS
The methods aspect represents the day-to-day operations of a business. It describes how an entrepreneur
will run the business from all facets of the business such as the manufacturing of goods, service delivery
process, distribution of goods and services, logistics for delivery of goods, and inventory management.

Manufacturing is the process of translating raw materials into finished goods that are acceptable to the
customer’s standards. Three elements:
1. Inputs – the materials or ingredients to be used in creating the product.
2. Process – the transformation phase where inputs are processed by manpower and machines to come up
with final product.
3. Output – the final product of the process stage, which is intended to be sold to target customers.

Following Manufacturing sites:

 Home-based – most startups do not have financial capacity to establish a manufacturing site. This option is
the cheapest and highly flexible.
 Commercial space for rent – this is advisable if the business really requires a commercial space for the
processing of goods and if the home option is not viable anymore.
 Commercial space purchase – this option requires the biggest amount of capital expenditure, but it also
provides the entrepreneur substantial freedom and flexibility to design and run the commercial space.

Service Delivery Process

Service blueprint – service entrepreneurs must prepare a detailed flowchart of the service business.
Bottleneck – is a part of the process where there is an apparent inefficiency and where the customer waits
longer.

Distribution Method
Distribution – is the process of bringing the products or services to customers. Distribution is not a straight
process from the entrepreneur to customers; thus, the term supply chain or distribution channel was coined.
Manufacturer – it handles the invention, development, and production of the product or service.
Distributors – are entrepreneurs who often buy products or services to the manufacturers and sell them at a
markup price to either wholesalers or retailers.
Agents on the other hand, don’t own the products or services because they do not buy these from the
manufacturer. Instead, they negotiate with buyers as to how much or how many are to be sold.

The distributor or agent can assist the entrepreneur/manufacturer in the following:

1. Sharing industry knowledge, behavior, ad activities of the primary target market.
2. Pertinent rules and regulations imposed by the government.
3. Best practices in marketing and selling the product.
4. Best practices in operating the business.
5. Their respective sticky relationship with business associates such as suppliers, financial institutions, or
retailers, to name a few.

MANPOWER
One of the highest cost of operating a business but it is also the most instrumental to its success.
The right human resources who will handle certain business operations.

Job description enumerates the duties and responsibilities of the potential employee, including the scope,
imitations, and terms and conditions of employment. The heading of a job description is the job title, which is the
summary of what the employee will do.

Employee Qualification
In hiring suitable employees for the job needed, entrepreneurs will have to look for the following criteria:
1. Educational background – this gives the entrepreneur an idea on the degree of the candidate’s knowledge
of basic things.
 2. Work experience – this will tell him or her what to expect from the applicant and what he or she can
potentially contribute to the business based on his or her past positions and experiences.
3. Specific skill or knowledge – this one is important especially on technical jobs that require high proficiency.
4. Work attitude – this deals with the worker’s integrity and how he or she deals with his or her coworkers,
bosses, and customers.

Job Offer
Once the entrepreneur or the hiring manager has been convinced already of the credentials and the interview
answers of the candidate.

Job contract
It generally summarizes the terms and conditions of the candidate’s employment with the business. It usually
includes the following details:
1. Rank or position of the candidate.
2. A list of responsibilities or deliverables and its scope and limitations.
3. The salary and benefits including vacation and sick leaves.
4. Work schedule.
5. Probationary period if any and qualifications to become a regular employee.
6. The duration of the contract.
7. Resignation procedure (e.g., 30-day notice or leave immediately).

Employee Development

 Training people is one of the biggest investments of an entrepreneur or businessman.

 Employee orientation is usually a one-to-two-day session that summarizes the history of the business, its
vision and mission, policies and procedure, culture, and norms of the business.
 Buddy system is a training program wherein an expert team member is assigned to assist a new
employee in his or her function.
 Mentor-mentee program is a training program for supervisors, wherein they will be mentored by a
senior executive or senior office of the business.

Several strategies for talent management

1. Providing employees with a very competitive salary package that includes guaranteed bonuses,
performance bonuses, commissions, and other monetary incentives.
2. Nonmonetary benefits such as medical coverage, different types of leaves (vacation leave, sick leave,
emergency leave, maternity or paternity leave, study leave), decent and notable job titles, flexibility in
work schedule, awards and recognition for excellent performance, inspirational leaders, transparency
and fairness in employee performance evaluation, and channels to which employees can provide
constructive feedback without the risk of being fired.
3. Additional (optional) benefits such as annual trips (international or local), work-from-home opportunities,
scholarships, transportation and communication allowances, free meals and drinks, fitness programs,
sports programs, and other work-life balance programs.

MACHINES
It can be described as the “best friend” of manpower in producing goods and offering services.
 Equipment and other facilities
 Telecommunications and Information Technology
 Landline phones
 Mobile phones (smartphones, tablet computers, phablets)
 Laptop and desktop computers
 POS machines
 Accounting and inventory software
 Web site

MATERIALS
To be used in creating a product or performing a service, which includes supply chain management.
 Outsourcing is the process of appointing third party manufacturer to do the manufacturing operations of the
business.
 Patent is the right to protect the entrepreneur regarding the product or service.
 Trademark is a sign or symbol that helps distinguish the product from others.
 Logistics – entrepreneur/manufacturers can also venture into distributing their products on their own
without the aid of a distributor or agent.
 Warehousing is storing the finished goods manufactured in a facility until they are distributed to end
users.
 Transportation it is the process of efficiently transferring the products to retailers or consumers.
 Distribution hub is where the entrepreneur/ manufacturer combines the goods before delivery to
retailers or end consumers.
 Inventory it is should also be tracked religiously by the entrepreneur/ manufacturer.

The Business Model

According to Don Deebelak in his article “Developing a Great Business Model” on the Entrepreneur Web site,
the entrepreneur must adapt the dynamics of traffic lights in developing the business model.

The Green Lights

1. Target high-value customers. These customers are often misinterpreted as affluent or high-end customers.
 Someone who is easy to find.
 Someone who is willing to pay a price that will reasonably profit the entrepreneur.
 Someone who is easy to persuade with the least promotional effort.
 Someone who can join the bandwagon of customers that, when consolidated.
2. Offer products or services with great value.
3. Offer products or services with reasonable profits.

The Red Lights

1. Satisfying the customer becomes too costly and irrational. In marketing, the term lifetime value of a customer
was coined to understand the potential value that a customer can bring to the business in the long run. But there
are obvious red flags, which are collectively called customer satisfaction cost.
a. Warranty
b. After sales costs

2. Being a market leader is difficult to sustain.

 If there are major customers purchasing the entrepreneur’s product or services.
 If there are major players in the industry that control the majority of the distribution network.
 If technology has changed the way the entrepreneur operates the business, compelling him or her to
invest on rigorous product research and development.
 If technology replaces the need for the entrepreneur’s product or service.
 If the competitors can easily tap the market of the entrepreneur.

3. Return on investment (ROI) takes too long and too small.

The Financial Plan

one of the most difficult parts of the business plan. It is also providing the entrepreneur financial data such as
liquidity, cash flow, and financial standing of the business. The financial plan also gives the entrepreneur bases for
his or her decisions on financial matters such as offering credit terms to customers, applying for a bank loan,
expand, or sell the business.

Capital is the money that will be allocated by the entrepreneur to establish a business.
Collateral refers to a high value asset that is submitted by the business to the bank when applying for a loan and
will be subject for repossession if the business defaults.

Factors Affecting Estimation of Revenue

 Revenue is the output of a sale wherein the sales price exceeds the cost to produce the product or render the
service. Revenue is considered earned when the product is already sold or service has been rendered regardless
if the business is paid in cash or credit. Revenue is considered deferred when the product or service has not yet
been delivered or sold but the customer already paid in advance.

1. The economy and the external primary target market.

2. The external competitors.
 Direct competitors are those that offer exactly the same product/product lines or services as the
entrepreneur.
 Indirect competitors are those that do not offer exactly the same products or services but influence or
affect the entrepreneur’s market share.
3. The internal business.