GenesisYour vision for the Future

“GENESIS” – Your Vision for the Future

“GENESIS” Corporation is a company that deals with production of computer software and business applications that are essential for successful conduct of business today. We strive to provide affordable, innovative software solutions to users worldwide by applying creativity, experience and teamwork. The result of our efforts is production of high quality business solutions that make our customers’ live easier and their businesses more profitable.

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With the customers as a center of our mission, we succeed to produce successful results on challenging products. In achieving of this goal, we accept the customers as equal partners that we can rely on. We hope that every customer looks at the software that we produce as they look to their most valuable employees and even more, as representatives of their culture, keepers of their history, and advisors they trust. The ultimate goal is to establish “Genesis” as a high-end software design and engineering company that reaches the marketplace through product development and market partners.

A friend of Boris, who is working in Moscow, mentioned that the labor market for computer software in Russia is full, while the demand is not only lower than the previous year, but also decreasing because of the economic crisis in the country. At the same time, the US economy is prosperous and the software market is booming, which raises the wages for specialists in software development. Since software is an intangible product and can be shipped from country to country via the Internet without customs and duties on the national borders, it can be easily produced in Russia and downloaded within minutes on a server in the US. The fact that the average software specialist salary in Russia is 10-15 times lower than that of his American colleague can explain why it may be so profitable to sell programs developed in Russia to the American market.

A new opportunity for software development opened this year and has not been totally explored by the traditional software developers in this country. From January 1999 a new common currency, Euro, will be introduced in the European community and many banks, financial service companies and even individuals will need new software to put Euros into their accounts. Most programmers in the States are busy now solving the 2000-bug problem and do not have the opportunity to develop Euro-related software within a short time frame. Because of that the idea to import the Russian software looks like a gold mine.

A third reason why such activity would be profitable, is the abundance of anti-virus and anti-hacker programs in the Russian market. This is the consequence of extensive hacker activity within the country, and many businesses are buying it, fearing of losing confidential information through the Internet.

In addition to this, there are very few programs that would convert metric system into other measurement systems and many scientific laboratories that cooperate with international R&D departments will need such automatic converters and are ready to pay a premium price to those who would offer them.

Taking all the above into consideration, we decide to establish a company which would make the software developed in Russia available to consumers in the United States. We estimate that such a company would be one of the lowest cost producers in this country with the product quality equal to that of an average American software developer.

Software products emerged as soon as computers were invented. Among other kinds of software, many commercial titles serve for banks, R&D departments, and financial companies, who are using them for everyday calculations, account maintenance, PC and on-line banking, etc. (Recently, appeared an urgent need to cope with the year 2000 problem and the newly born currency, the Euro.) Such companies, if they are logged on some external network (like the Internet, for example) will also need software to protect themselves from hackers. On the other hand, many research and development departments, scientific research laboratories, and engineering departments in the United States and other countries that have measurement systems other than the metric system, need software to convert their numbers when they communicate worldwide.

In 1994, those types of programs were a $5 billion a year business in the United States (a $4 billion market in Japan, $15 million worldwide). Nine years earlier, the industry appeared stagnant; retail software sales were less than $100 million in 1985, down from $3 billion in 1982. Its rebirth exceeded everyone’s expectations. Since 1985, Microsoft Corp. has dominated it with over 150 million of their individual programs sold worldwide (over 50 million were in US businesses). Nearly two-thirds of the banks in North America use Microsoft software.

We are a relatively young company. We are facing uphill competition from the leader in the traditional market, but we can say that our company has a strong potential in the niche we have found. Genesis is in a position to continue it’s further development due to the cost advantages and its small size and market. In order to present you with a clear picture of our company we have to give you an idea what our market looks like.

MARKET SIZE: in 1994, commercial software for banks and financial companies was a $5 billion a year business in the United States (a $4 billion market in Japan, $15 billion worldwide. American companies were spending approximately $7 billion on banking programs as of 1994. With the $5 billion spent on currency exchange and securities, trade hardware and software, the $12 billion total were nearly two and one-half times the size of the $5 billion traditional banking programs. Currency conversion software has experienced resurgence in interest in recent years, partly because they have become more “banker-friendly”. Banks are demonstrating more and more interest in interactive multimedia forms of securities trade. Although the standard business software offered only limited graphics performance, over 150 thousand banks worldwide are a potential market for interactive securities trade and currency exchange commercial software.

SCOPE OF COMPETITIVE RIVALRY is international, but the primary producer is Microsoft Corp. who is struggling for the markets in Japan, Western Europe, and the US. The main competitors are Netscape, Compaq and Phillips Electronics. Growing advertisement budgets for new software titles signal just how competitive the industry is becoming. Microsoft spent $5 million to promote its new title designed for New York Stock Exchange in 1997. Good Times Programming undertook a $3 million to $5 million campaign for its October 1994 launch of “Banking Online”, one of the industry’s most successful software titles.

STAGE IN LIFE CYCLE: mature. After years of steady growth the industry revenues were expected to decline slightly in 1994 and 1995. Industry analysis attributes the decline to a maturing market, although new program systems are expected to offset some of the decline. Nevertheless, some of the markets, like the “year 2000”, or “EURO- New Currency”, are not yet fully satisfied. Since 1998, the number of available programs has increased substantially, primarily because of the large number of Microsoft licensees. At the end of 1994, for example, the leader had a library of 466 titles.

NUMBER OF COMPANIES: the industry is characterized by oligopoly, when most of the market is occupied by two firms: Microsoft and Compaq with the rest possessing only an insignificant market share. Nevertheless, the share of Sony and Philips may grow in the “Next Generation” systems. Competitive forces in the marketplace increased the need for higher quality and distinctive business software concepts. Competition for new programs that would help managers of the future and will build a strong base for doing business and other media “hits” is increasing the development costs for software producers.

MAIN MARKET SEGMENTS: the potential customers for interactive multimedia systems formed a business pyramid roughly divided into four tiers, consisting of innovators, early adopters, other interactive system users, and mass market consumers.

[Innovators have a history of buying new systems that offer significant technological improvement over existing alternatives and are generally insensitive to price, software availability, brand identification, breadth of distribution, and factory support. It is believed that the class of innovators for banking interactive systems consists of approximately 500,000 consumers.

[Early adopters are similar to innovators except that they consider price/performance and software availability more carefully. Like innovators, they are motivated customers who learn about a product through word-of-mouth even if it is not advertised heavily. It is believed the class of early adopters consists of several hundreds banks and finance corporations.

[Current users are companies who currently own at least one commercial system. These consumers base their purchase decisions on value, software availability, and price. It is believed that there are approximately 50 thousand banks worldwide are consumers of those products.

[Mass-market customers are those who have PCs in the office but currently do no use commercial software.

DEGREE OF VERTICAL INTEGRATION: the process of title development is generally separated from hardware and software production, although some title developers have made attempts to produce their own software. Software is priced to generate most of the profit; the hardware market is, typically, separate from it. The software for most PCs runs between $300 and $500. Software developer costs to create a new program ranged from $75,000 to $300,000, with some CD titles costing $1 million to develop.

EASE OF ENTRY/EXIT: moderate entry barriers exist in the form of strong customer loyalty and brand preference. Distributors are unwilling to accept merchandise from an unfamiliar manufacturer, who does not have a high publicity level and strong public image. Small program publishers without the resources of the big players in the industry face an uphill battle. Retailers only take their product if they had a strong brand name, backed with advertising dollars. But without shelf space, it is hard for small publishers to build a brand image and start generating revenue necessary to fund large-scale marketing campaigns.

DISTRIBUTION CHANNELS: electronic and computer software stores were the traditional retailers of PC programs. However, as the software business grew, other retailers began carrying them because of their high margins. In 1994, over 20,000 stores in the United States carried such programs. Circuit City was the leading retailer with an estimated 20 percent of the US market; mass merchandising (e.g. Best Buy) captured about 35% of all sales (see the table).

Circuit City

IBM software

Despite overcrowding of traditional distribution channels, analysts predicted new channels of distribution to emerge. Technology is making new forms of distribution possible. Several companies were experimenting with direct marketing, the use of cable downloads, and on-line distribution via the Internet. There was also the potential that the increased bandwidth of phone and cable systems could make network distribution possible.

SEASONALITY: Retail sales of commercial software are quite stable during the year and do not jump like most of consumer electronics sales during the Christmas season, because the main customers do not depend upon the calendar holidays.

TECHNOLOGICAL CHANGE: not so rapid as in microprocessors or PC industry, but relatively significant. It is one of the main driving forces and one of the factors creating risk: because it takes 10 to 15 months to complete the original program and then another 3 to 6 months to market it, development risks are quite high. A lot can change between the time a design was started and the time it is launched into the marketplace. Software that was popular last year can be out of fashion 12 months later.

PRODUCT DIFFERENTIATION: very high. Each program is different and many incompatible operating systems are existing: Windows, Compaq system, etc. Currently, there are more than 20 consumer computing and calculating formats available in the US, many of which are incompatible.

COMPETITIVE FORCES – After the overall industry analysis it is necessary to view the competitive forces and the rivalry intensity. Since the market is already highly saturated, competition is high. In the past years, the marketing of commercial software has been unsophisticated. Demand was stimulated by the advertising campaigns of the platform providers such as Microsoft or Compaq. Demand was so strong for the hits that publishers merely had to get them into the stores. Advertising led to word-of-mouth publicity and sometimes only consisted of ads in leading software advertising magazines and a booth at the Consumer Electronic Show.

As of 1994, marketing was becoming a more significant competitive factor. As retail shelf space became more crowded with platforms and commercial software, companies initiated a marked shift in marketing strategy. The major releases started to be promoted much like a release from a major movie studio. Direct marketing, merchandising, mail promotions, and special offers became commonplace. The number of competitors has increased as new generations of software systems appeared on the market, and the demand cannot grow as fast as it did previously. One of the reasons why the demand is so slow is the economic crisis in most of the world, especially, the Asian Tigers and Russian Federation. The matter is also complicated by the fact that the new rivals are more diverse in terms of their visions, strategic intent, objectives, resources, and countries of origin. Nevertheless, these factors are offset by the fact that in order to switch brands, customers have to incur the cost of acquiring a new network platform that may be priced as high as $200.

POTENTIAL ENTRY – The following factors are complicating the potential entry: brand preference and customer loyalty and limited access to distribution channels. In 1994, retailers found many of the Windows based programs sitting unsold on the shelf; sales seemed to be concentrated in a handful of hit software. Moreover, it was the practice of many retailers to sell newly stocked programs for fully set price only for 30 to 60 days, after which they were sold at a discount. With retailers holding excess inventory, it was not uncommon to see titles that originally listed for $60 discounted to the $15 to $20 range. DFC Intelligence Research identified that retailers were most concerned with the difficulty of deciding what to buy and heavy price discounting due to increased competition. In 1994, retailers as well as direct marketers had become very careful in what they would stock. Buyers looked at three things when deciding which brands and titles to stock: the quality of the software, the amount of advertising the publisher planned to do, and the reputation of the publisher. But, as we noticed in 1990’s, such an entrance barrier can be easily overcomed by a company that has already established its status and popularity in consumer electronics, such as Philips and SONY. The latter is, as Microsoft’s president thinks, the biggest adversary in banking computer systems in the coming years.

SUBSTITUTE PRODUCTS – The substitute products for commercial as well as scientific software are very limited and even obsolete, because no bank would use the old pen-and-paper software to make calculations. Nevertheless, the marketing base is very narrow, since the companies that directly deal with banking will buy the banking programs. Also, only those research and development laboratories that are interested in the software and are willing to pay for such software will be willing to buy it (that is, they have to share their information with consumers based on the metric system).

Since our business is relatively small and qualifies for the requirements of S Corporation, we decided to take advantage of the benefit offered by the IRS and register as an S Corporation entity. Benefits include the following:

1.When the corporation has losses, the S election allows the shareholders to use the losses to offset other income;

2.When the stockholder’s tax bracket is lower than the corporation’s tax bracket, the S election causes the corporation’s entire income to be taxed in the shareholder’s bracket, whether or not it is distributed. This is particularly attractive when the corporation wants to accumulate earnings for some future business purpose.

3.As mentioned, a single tax on corporate income is imposed at individual income tax rates at the shareholder level. (The income is taxable to shareholders whether or not it is actually distributed.)

The business consists of 5 departments: advertising, marketing, financial, labor and sales department. All of them, except for labor department, are in the US. The corporate headquarters are in the US as well.

1.The marketing department prepares research for a particular product market niche in the United States, which has not been yet filled by the big competitors. After it has analyzed the supply deficiencies in the program system converter market, our main offers and areas of interest for the future will be anti-virus and anti-hacker software, rusticators, software that installs the euro conversion system on other programs (mainly financial), software attachment for Windows that automatically converts miles into kilometers, inches into the metrical system, Fahrenheit into Celsius, etc., and financial software for on-line banking. The marketing department constantly keeps an eye on changes in the market and new opportunities for success.

2.The advertising department is responsible for finding new customers and communicating the product offer to them.

3.The financial department is responsible for developing the budget for our new product offers, estimating the development cost and the gross sales for the first half year, finding ways for preferential tax treatment for our international transactions, establishing credit lines with the customers, long-term financial planning and control, auditing the departmental expenses, managing cash and currency exchange and general bookkeeping and tax processing.

4.Labor department consists of a few persons who are experts of the labor supply in Moscow. They keep in touch with the best technical Universities in the country, find the best students, and maintain personal contacts with more than two hundred independent programmers in the capital. When the order comes, they select the specialists who possess the specialized knowledge in the particular area involved and make an offer to them. The best bidder gets the contract and usually prepares the program within a few days. Since the market is very competitive and the wages in general are low, we manage to reduce our product cost far below that of any other software manufacturer within the United States, while maintaining high quality level and customer satisfaction.

5.The sales department usually receives orders from a particular customer and delivers the program either via mail on a CD or instantaneously via the Internet. We accept the unpacked CD back within 30 days form the date the customer received it with a total money refund, but in view of extensive software pirating with except the unpacked CDs and refund the money only if the program does not work properly. The sales department also offers technical support on the telephone or via the Internet. In order to protect our product from pirate use, we have installed a system in our programs that send cookies to our every time that computer is logged on the Internet. When unregistered, our programs automatically uninstall themselves within 48 hours.

Typically, the commercial software market is a higher-margin “commodity” business that requires several layers of sales intermediaries between the manufacturer and the consumer – manufactured to distributor, to jobber, to electronic store or service station and to consumer. Fortunately, the Genesis programs are unique in that they have no direct competition due to their patented design, lifetime warranty, superior performance, and individual approach.

With proper marketing, they can be sold directly to the consumer at very attractive non-commodity type product prices and profit margins.

When we purchased the asset of BankCompute Corp. in October 1992, the company was selling 70 percent of its product through ads in men’s “handyman” magazines such as Popular Banking and 30 percent through the traditional commercial electronics channels. The suggested retail price was $300-$400 per program disk, which was the price, advertised in magazines, plus $2.50 shipping and handling. There was no shipping cost for downloadable programs.

One customer, a catalog company similar to Sharper Image had begun selling the product through its catalog at $310 per disk plus $5.00 shipping and handling. After the purchase of assets, we raised the minimum wholesale price to $345 per disk with a suggested retail of $425 per standard program. Subsequently, the wholesale price has been raised to $431 per disk. By the end of December, we have become the number five all-time best sellers for Sharper Image. Thanks to aggressive insertions of the catalog in almost every domestic airline magazine during November, Sharper Image sold over 823 disks.

The advertising department is responsible for finding new customers and communicating the product offer to them. It analyses who the main users of our product would be and in what ways can we make ourselves known to them. Since our main customers are not individuals, but rather financial service companies, R and scientific departments, linguistic centers, etc., we do not advertise extensively via TV or radio. Rather than that, we put our announcements in specialized newspapers and magazines, send offer packages directly to prospective customers, and exhibit our products on local regional trade fairs.

Genesis’ financial department is responsible for planing and developing of the entire company’s budget and the overall financial transactions. It encompasses several important sectors that enable the whole functioning of the company to be efficient and profitable. The main concerns of the financial department are:

Øplaning and development of the company’s budget

Ødeveloping budget for our new product offers

Øfunds (obtaining funds and funds management, collecting funds or funds crediting)

Øauditing the departmental expenses

Øgeneral bookkeeping and tax processing.

Being a small, newly established enterprise, fighting to strengthen its position on the market, Genesis’ prime concern is to work on a low-cost high-profit basis that in the same time will satisfy the needs and preferences of the company and of it’s customers as well. Therefore, the financial department puts a special emphasis on certain key-areas, which are considered to be of essential interest. Those areas are:

Ølong-term financial planning and control

Øestablishing preferential credit lines with the customers

Øexploration and finding of favored tax treatment for the company’s international transactions

Ømanaging cash and currency exchange.

Working in a highly competitive industry such as the computer software business requires exceptionally trained employees, experts in the field of computer programming and computer networking. The demand for experts with that profile is constantly rising. Therefore, GENESIS is aware of the crucial importance of its existing cadre and is steadily striving to maintain the manufacturing department as a unique unit in the corporation.

The cores of the department are four computer science experts from Moscow. They have an enormous experience since they have spent almost half of their working life in the military industry, holding special positions related to computer programming and maintenance of sophisticated military systems. Also, they have widely spread net of connections with their former colleagues and students on the technical faculties all over Russia.

Their prime responsibility is to establish and maintain personal contacts with computer programmers. The best technical Universities and the best students are their prime target for recruiting. As an addition, it is worth mentioning that only Moscow has more than 1000 highly educated and experienced programmers that are already working on software design and engineering projects. The essence of the manufacturing department is very simple: when the offer comes, Genesis’ experts select the specialists who possess the specialized knowledge in the particular area involved and make an offer to them; the best bidder gets the contract and usually develops the program within a few days. The manufacturing division views the cost containment as the best way for the company to achieve the overall financial performance objectives. Since the market is very competitive and the wages are low, but still higher than the average income in Russia, we manage to reduce our product cost far bellow that of any software manufacturer within the United States, while maintaining high quality level and consumer satisfaction. After the software is being prepared, our branch from Moscow sends it via mail, on a CD or instantaneously via Internet to the headquarters in Santa Rosa, Silicon Valley. In this way Genesis is flexible enough to meet special customer design requirements and to offer quick delivery.

The manufacturing department of GENESIS is especially proud of its manufacturing philosophy. We refer to it with the Japanese designation keiretzu, which means chain – connection. The key orientation of the keiretzu is the development of an entire network of reliable partners – that is experienced programmers responsible for software design and engineering. Enhancement of communication, satisfactory financial compensation and quality programs is the formula for success and opens the doors of our customer’s vision for the future.

Graphic Depiction of Keiretzu – Chain or Network

Given our limited financial resources, we were not able to invest much capital in marketing. Similarly, we decided to avoid entrenched retail competition, which was essentially dominated (90 percent of the banking market and 78 percent of the research engineering market) by two companies: Microsoft and Compaq. Because of the high-quality, patented design of our programs (which actually did work better than ordinary software), we believed we could sell directly to the consumer, rather than to the retail level. We investigated a concept in direct-response marketing known as “syndication.” Syndicates are third-party entrepreneurs who print ads in scientific and business magazines, and credit card billing inserts on the basis of nothing in advance and a percentage of sales. Thus, the up-front investment in advertising would be zero. Moreover, in the case of billing inserts, we would receive the bonus of an implicit endorsement by the credit card company, who themselves may be our customers. Daring to raise the suggested retail price of the software from $300 to $355, the company forged ahead with this strategy in limited tests.

The test conducted last year, proved extremely successful. In particular, cash flow was attractive, since more than 60 percent of the catalog test orders were charged on credit cards. The company thus received its payments within 5 days; through traditional retail channels the store would pay Genesis 45 to 90 days after receipt of the product. Given the results of these tests, we believe the future of our company is promising. Accordingly, we began planning for the associated ramp-up, in expectation of sharply increased orders as we rolled out the syndicated advertising campaign. It was with these expectations that we sought $500,000 in loans and equity.

By early 1998, Genesis was apparently on the verge of enormous growth. Accordingly, the company needs capital to build inventory and finance the projected ramp-up. In total, the management is seeking a $500,000 investment: a $150,000 term loan secured by all assets except inventory and receivables, a $75,000 term loan secured by existing inventory, a $100,000 revolving credit line secured by new inventory purchases and receivables, and $175,000 in convertible, redeemable preferred stock.

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GenesisYour vision for the Future. (2018, Jun 19). Retrieved from