FREE ESSAY ON GENESIS-YOUR VISION FOR THE FUTURE

GENESIS-YOUR VISION FOR THE FUTURE

Introduction:
"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. 
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. 
Our History
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. 
Industry History
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 Analysis
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 
Other Software stores 
IBM software 
Commercial and business stores
Consumer electronics
Mass merchants 
20%
10
15
15
5
35
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 Analysis
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).
Business Summary
Legal Issues
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.)
Horizontal structure of the company
Organizational Structure
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. 
Product Line:
Marketing Department
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.
Advertising Department
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&D 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.
Financial Department
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: 
? planing and development of the company's budget 
? developing budget for our new product offers
? funds (obtaining funds and funds management, collecting funds or funds crediting)
? auditing the departmental expenses
? general 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:
? long-term financial planning and control
? establishing preferential credit lines with the customers
? exploration and finding of favored tax treatment for the company's international
transactions 
? managing cash and currency exchange.
Manufacturing Department
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
Sales Department
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.
Summary
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.