A N C H O R IN G Y O U R B U S I N E S S P L A N S W I T H A S T R U C T U R E D F R A M E W O R K

A ME T HOD F OR CR EA T IN G CON SI S TE NT , A CCU R A T E , AND ENGA GI NG BU S IN ES S P L AN S FOR S TAR T-U P S .

P R EP AR ED BY WH I TE FOR E S T CO NSU L T ING , L TD . H TTP : //W WW .W H IT E - FO R ES T. CA

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TABLE OF CONTENTS

TABLE OF FIGURES 3

INTRODUCTION 4

ANCHORING BUSINESS PLANS WITH FRAMEWORKS 6

WHY WE USE FRAMEWORKS 6 HOW TO USE FRAMEWORKS 8

APPLYING THE STRUCTURED FRAMEWORK TO YOUR BUSINESS PLAN 11

COMMON ELEMENTS OF A BUSINESS PLAN AND STRUCTURE 11 - OTHER COMMON FRAMEWORKS 13 NEW PRODUCTS 13 INDUSTRY AND MARKET ANALYSIS 14 BUSINESS SITUATION AWARENESS 15 PRICING STRATEGY 16 PROFITABILITY FRAMEWORK 18

CONCLUSION 19

ABOUT WHITE FOREST CONSULTING 20

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TABLE OF FIGURES

Figure 1. Components of Business ..................................................................................................................... 7 Figure 2 Start-up Framework ........................................................................................................................... 12 Figure 3. New Products Framework .............................................................................................................. 13 Figure 4. Industry and Market Analysis Framework .............................................................................. 14 Figure 5. Business Situation Framework ..................................................................................................... 15 Figure 6. The Leverage of Price and Profit Source: Michael Mara and Robert Roriello, “Managing Price, Gaining Profit,” Harvard Business Review (September–October 1992): 85. ....................................................................................................................................................................................... 16 Figure 7. Pricing Strategy Framework .......................................................................................................... 17 Figure 8. Profitability Framework .................................................................................................................. 18

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INTRODUCTION

A business plan is a formal presentation designed to introduce you and your business to potential funders. It is a piece of persuasive writing prepared for an audience that may have very limited knowledge of the market you are trying to enter. As a piece of persuasive writing, it can either succeed in persuading its audience that your business has the potential for profit and growth, or fail.

The first step in persuading an audience is to know the audience that you want to persuade, and we at White Forest Consulting have done some of that work for you: Loan officers from the Business Development Bank of Canada have given us some high-level insights into what they are looking for while processing loans and grants. Your business plan needs to give an accurate and effective assessment of the background and outlook of your chosen market, present your business idea, demonstrate the profitability of the chosen business model, and demonstrate your knowledge and expertise that will make your business a success. But that’s not all; your business plan must also show your personal character: your judgment, your creative problem-solving skills, and your analytical vigour.

A thorough, articulate, and well-researched business plan lays the foundation for obtaining the funding that you need. Writing a great business plan is an exact exercise and in experienced hands, it can be instrumental in achieving your goals. Conversely, a poorly written business plan can significantly decrease your chances of getting funding. Careless mistakes form consistent patterns that can be easily spotted—by yourself or a hired consultant, or, much worse, by a loan officer or potential investor. These are some of the most frequent mistakes made by entrepreneurs:

1. Lack of internal consistency. This is the error most frequently made by beginners. Inconsistency will often lead to the investor concluding that you do not know the market or your own business well enough. Examples of this mistake include quoting conflicting statistics, numbers in charts not matching numbers in text, and facts conflicting with your conclusion. This error often occurs when entrepreneurs decide to “just start writing.” While this old practice works fine for creative writing, it is simply the wrong approach for technical and formal communication—fields in which you must thoroughly develop and understand your arguments, and the structure in which you intend to present them, before putting down a single word.

2. Lack of credible background research. This mistake will discredit your business ideas and the remainder of the plan, no matter how well it is organized and written. It manifests in incorrect or out-of-date data, erroneously drawn conclusions, and overly optimistic market projections. This error might appear when the entrepreneur starts searching for support information while they are writing the business plan. The studies and facts they cite often only partially apply to the circumstances, and will cast doubt on the credibility of the document as a whole.

3. Lack of a clearly stated, profitable business model. The goal of any for-profit business is to generate profit. Be clear about your business model. Think through the entire value chain: inbound logistics, operations, outbound logistics, marketing & sales,

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and services. Delineate how you plan to perform each of these steps, how much the cost will be, and how much profit you expect. Oversimplification can be the culprit here. Do not just think rent, marketing, and logistics. Think in terms of opportunity costs, cost of promotion, and other hidden costs specific to your industry.

4. Lack of acknowledgement of risks and competition. While it is impossible to identify and address every possible risk or competitor, the most important and obvious ones should be acknowledged, along with how the management intends to mitigate the effects of these risks. Identifying these challenges enhances your credibility and increases the confidence that potential investors will have in the business plan and its financial projections. Again, don’t limit yourself to simplistic thinking. Listing “user not adopting our service” or “product is too expensive” doesn’t show the amount of thought necessary for a good business plan. Understand the fundamentals behind the risk and your competition. Ask yourself: What is the competition barrier entry? Do you have favorable regulations? Are you entering into a mature or emerging market? You must go beyond the product to acknowledge the business factors. After all, a business continues to exist only if it can serve the needs and wants of its customers.

White Forest Consulting has observed that these mistakes are caused by two things. Firstly, a failure to structure the business idea rigorously before starting to write the business plans. Secondly, entrepreneurs often obsessively focus on one or two aspects of running a business—the product, the marketing, the balance sheet—to the point where they forget to put them in context of achieving business objectives. The result is an incoherent, inaccurate, unclear, and incomplete business plan that doesn’t actually focus on the most important thing: the business.

We are not deprioritizing the goal of entrepreneurs to develop a product. But without customers, there is no product. At best, the product is still only one side of the coin. Entrepreneurship is more than that. It is the successful management of uncertain and constantly changing situations; showing that you are able to manage these ambiguities successfully and consistently will make for a convincing business plan.

White Forest Consulting recommends the strategy of following a rigorous, structured framework for writing a business plan. Frameworks are proven tools, favoured by consultants for one simple reason: they are a brutally effective way to organize and manipulate large amounts of qualitative data.

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ANCHORING BUSINESS PLANS WITH FRAMEWORKS

A framework is simply a structure that organizes your thoughts and analysis in a logical manner. You start with an objective and develop the issues in a non-committed manner, until you have a complete issue tree that completely and concisely solves the objective that you laid out.

A framework allows you to manage large, complex issues by breaking them into logical components. By skillfully laying out the issues, you can manage large amount of data without confusion or repetition.

You can find many sample frameworks, built for various purpose, online, but to truly capture the spirit of your business accurately and concisely, your framework must be custom designed. The appropriate structure will allow you to quickly and efficiently organize and present various components of your organization, decreasing the time you’ll need to spend actually writing by making the process more efficient. In the end, it will create value for your business.

WHY WE USE FRAMEWORKS

We use frameworks, as well as recommend entrepreneurs to use frameworks, to 1) thoroughly develop the client’s business ideas, 2) encourage consistent and rigorous thinking and analysis, and 3) reveal weaknesses in business models to allow for self-diagnosis.

1. Thorough development of business ideas

Frameworks allow you to develop your business ideas thoroughly and succinctly, following the MECE principle. MECE is a principle used by management consultants to frame a large case into complete, distinct, non-overlapping issues. MECE stands for “Mutually Exclusive, Collectively Exhaustive.” By mutually exclusive, we mean that items on the list are distinct and you aren’t repeating yourself. By collectively exhaustive, we mean that the items on the list capture all relevant information about your business. So, basically, MECE means “miss nothing and avoid confusion.”

The framework, or the structure, needs to capture your business idea in a logically organized fashion. Before you write down a single word, spend some time mapping out the framework. From a birds-eye view, on a single page, capture the spirit of your business. Remember: elements of your framework are not committed; you should work on each issue until it has a place in the greater business context.

Before you go too far with product development, it is a good idea to focus on two issues: business profitability and market analysis. We recommend that you go through these two frameworks before even thinking about issues such as marketing. These steps will let you know:

a. If your business will be profitable; b. If your business will be competitive.

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These analyses do not have to be extremely accurate. A quick back-of-envelope calculation will give you the answer you are looking for. Ballpark estimates are fine, as long as they are in the right direction and magnitude.

2. Consistent and rigorous thinking and analysis

Without a structure, it’s hard for your ideas to stand up. The vast majority of entrepreneurs arrive at decisions and conclusions ad hoc, without a recognizable structure or factual support.

By structure, we simply refer to the basic components that make up a business: company, product, competition, and customer. Each of these can be broken up into smaller constituents. In order to have a consistently developed idea, each of these elements must strengthen the other components.

FIGURE 1. COMPONENTS OF BUSINESS

As an example, if your business goal is to develop a high-end, business-oriented web service, then your company must develop a product that complements and justifies the prestigious price it commands, and that should be affordable only to the top-tier market. Your main competition will be other boutique web service providers, fighting for the small pool of customers who can afford such services. You must bear these premises in mind when you present every graph, propose every idea, and develop every product. Failure to do so will result in an incoherent and illogical plan that won’t convince anybody.

Every statement you write must be supported by internal coherence, logic, and facts. Disciplined analysis within a framework will often yield insightful observations that showcase deep thoughts and keen observation.

Ask yourself: Do I want to sell a large number of products at lower prices, like Honda or Toyota? Or do I want to sell fewer individual products at higher prices, like Mercedes or Audi? Depending on your preference, you need to grasp the appropriate market size,

Business Objective and Goals

Company

Product

Competition

Customer

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competitive environment, key players, etc. Go through these exercises thoroughly. Fine tune your product for your business and consumer—not the other way around.

3. Finding weaknesses in a business model

Not every business idea is marketable right away. Most business models needs constant tweaking to make them profitable. The tweaking will occur constantly—as you plan the business, as you operate it, and as you grow it. This process is known as management. Without good management, even the best planned business models can fail in the real world. Your expertise and capability as an entrepreneur needs to shine in this section, showing your judgment, problem-solving skills, and your analytical vigor.

The top-down view of frameworks allows you to quickly examine the key aspects of your ideas and quickly evaluate a plan for profitability. Frameworks are structured so that you can break down your costs and revenues and test your assumptions. It’s also easy to test assumptions with different cases of your business development.

This is an absolutely critical aspect of planning your business. It gives you a chance to ask yourself crucial questions: How will your business look like if the assumptions you made were wrong? How catastrophic would these failures be? How would you mitigate risks of failures? You will want to test out every single assumption you make, gauge how likely these events are to happen, and lay out a plan for contingencies.

Entrepreneurship comes with risks, and your business plan’s audience will know this.

Honestly facing that there are risks to your businesses, and laying out the steps you’re

taking to mitigate them, will reveal maturity and professionalism on your part. It is a step

that entrepreneurs often fail to take. This is a good way to set you apart from your

competition.

HOW TO USE FRAMEWORKS

A framework cannot exist in a vacuum. It must be created with an objective in mind. In the case of a start-up business, you are using the structure to frame business ideas, test assumptions, ensure a profitable model, and organize information.

We have included several examples of frameworks that were custom designed for some of our clients. It will be rare for you to find an existing structure that describes your business in detail. You will need to customize the framework to fit your situation.

Whether you are creating a new framework to fit your unique business situation, or you are customizing an existing one, there are several general guidelines you should bear in mind that will make your endeavour successful.

1. Use a top-down approach

Frameworks are a way to organize your thoughts in a consistent and logical way. To make the most out of the structure of frameworks, you need to start with the big, high-level

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questions: What are your missions and business objectives? What do you know about the market that you’re about to enter? What expertise do you have to open such a business? Will it be profitable? Gradually, work your way to more detailed-oriented questions: What is the best way to reach customers? What is the best allocation for start-up funds? How will you retain customers?

The top-down organization makes it easy for you to focus on the big picture, your business, and it also orients your writing towards your audience, the potential funders for your company. Each paragraph that you write will support and build rapport with what you’ve written before, giving your writing a sense of clarity and balance.

White Forest Consulting recommends that you always focus on the business aspect of your start-up first. Walk through the high-level questions, and be honest with yourself about what your plan has and what it lacks. Do not try to be the first in the market for the sake of being the first. Being there has little to do with success; success comes from being in the right market, at the right time. For example, between 1972 and 1974, Bill Gates and Paul Allen thought many times about writing an operating system using the computer language BASIC. However, it was not until after the release of the Atari 8000, in 1975, that they judged the time to be right. They founded Microsoft a few months later.

2. Use analysis to justify your objective and goals

Once you start laying out the frameworks for your start-up, you will soon realize that there is a potentially endless list of topics that you could go into detail on and analyze. You could easily write pages upon pages including details such as location, employee benefits, pricing strategies, etc., but, in reality, there are only small subsets of issues that you should focus on. These include the pillars that are fundamental to meeting your business objective and goal. These may be specific to your business or industry. For example, if your business will be an online marketing agency, it would be important to discuss how you plan to develop your professional online presence.

Do not “boil the ocean” and exhaust your writing. Too much analysis is not a good thing: it shows that you’ve failed to prioritize your ideas and will result in a rambling, unfocused business plan.

3. Base all assumptions on facts

A business plan is a piece of formal, persuasive writing. As with all persuasive documents, you need to incorporate elements that maximize your credibility while decreasing the probability of a successful counter argument. The best way to establish credibility is by incorporating facts into your writing.

Every single statement that you write should be the result of research, either explicitly gathered from outside sources or gleaned from your prior experience. If you need to introduce a new premise into your argument, introduce the source. Compare the following: “More users than ever are adopting LED products as a reliable and energy efficient lighting fixture” vs. “The continuously growing sales of LED fixtures suggest that more users are adopting this reliable and energy efficient light source.”

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What makes the second sentence better? It’s simply that we introduced the source of our premise, the continuously growing sales of LED lighting fixtures. This lends authority to writing, and makes for a more credible, convincing piece as a whole.

4. Reach reasonable bounds for your estimates

We just emphasized the importance of using fact-based assumptions. However, it is important to understand that business is not an exact science, and projections are not meant to be precise. In a business context, the future is determined by a large number of variables, some of them are impossible to estimate.

In the consulting industry, we have a popular adage: “It’s better to be approximately correct than be precisely wrong.” We take back-of-envelope calculations very seriously. They are often the most time-efficient ways of arriving quickly at a conclusion.

Using established bounds for products can be a good way to give educated estimates for brand new products that you are trying to bring to the market. If your product is completely ground breaking, it might be impossible for you to find baselines to establish comparisons. In these cases, you’ll have to triangulate around tough problems. Suppose you are launching a new, 3D, holographic computer processor, the likes of which the world has never seen before. How long would it take before you see profit? How much should you spend on R&D? What would be your adoption strategies? How would you even go about answering these questions? If White Forest Consultants were faced with this problem, we’d start by digging annual reports from Intel between 1968 and 1973, as well as Motorola from 1980 to 1985. Even with entirely new products, you can find historical precedents to inform and support your plan.

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APPLYING THE STRUCTURED FRAMEWORK TO YOUR BUSINESS PLAN

In this section, we’ll lay out examples of several frequently used frameworks. Remember that the frameworks all tie back to the concept of business development. Not every single item on the list will apply to your situation, nor is there any guarantee that any pre-existing structure will fit your business perfectly.

COMMON ELEMENTS OF A BUSINESS PLAN AND STRUCTURE

The start-up framework is a structure that touches upon the concepts most frequently discussed during the start-up of a generic business. This should be a go-to framework for you. Work with it until you outgrow it with your business needs. At that point, you should expand to other frameworks to complete your idea-generation process.

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FIGURE 2 START-UP FRAMEWORK

•Who is your competition?

•How do competitor's prices/ products/services compare to yours?

•What are the barriers to entering the market?

•Capital requirement

•Access to distribution channels/suppliers

•Proprietary product technology

•Government policies

Market Research

•Management team

•Core competencies

•Previous experience

Management

•Marketing and growth plan

•Barriers to entry

•Competitive response

•SWOT analysis

Market and Strategic Plans

•What are your distribution channels?

Distribution Channel

•Description of the product or technology

•Competitive advantage

•Disadvantages

•Intellectual properties

Products

•Who are the customers?

•What are the best ways to reach customers?

•How will you retain customers?

Customers

•How will the projects be funded?

•What is the best allocation of funds?

•What is your ability to support debt?

Finance

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- OTHER COMMON FRAMEWORKS

These are examples of purpose-specific frameworks that were designed for particular clients. Within each structure, we identified a business objective that needs to be framed, and built a framework to respond to the objective. It’s easy to get sidetracked, so always focus on the promotion of your business.

NEW PRODUCTS

If you are trying to develop new products or services with your business, you can use the New Product Framework to anchor your business plan.

Within this framework, we work closely with issues relating to development and market of new products. These include IP, marketing, and R&D. For certain technology based firms, this framework needs to be further developed to showcase the potential for market share growth.

FIGURE 3. NEW PRODUCTS FRAMEWORK

•What makes your product unique or proprietary?

•Do you need patent protection?

•What similar, substitutable products are available?

•What are the pros and cons of your product?

• If you have existing products, how would the new product fit in line?

Product

•What are the barriers to entering this market?

•Who are your major competitors? What will their responses be?

•Are you at risk of cannabilizing your own existing products or services?

•How will you use your new product to expand the customer base and increase sales?

•What's the potential market?

Market Strategy

•Who will be the customers for the new product?

•What's the best ways to reach your customers?

•How will you retain your customers?

Customers

•How is the project currently funded?

•What's the worth of your existing assets and intellectural property?

•How are you going to allocate additional funding?

•How do you plan to support the debt?

•What's your exit strategy?

Financing

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INDUSTRY AND MARKET ANALYSIS

Use the industry and market analysis to develop an understanding of the industry/market for your new business. This exercise will help you price, compete, and perform SWOT analysis. You will also understand the trend for industry development, the capital you need in order to be competitive, your competitor’s products, and the concentration of suppliers and customers.

FIGURE 4. INDUSTRY AND MARKET ANALYSIS FRAMEWORK

•At what stage is the industry? emerging, expanding, consolidating, declining) How is it performing?

•What is the likely position for your business within the market?

•Analyze the SWOT of your competitors

•Are there any recent industry changes? (new regulations, technology, etc.)

•Identify the key to success (brand, customer service, size, technology, etc)

•What is the typical profitability of businesses in the current market?

Current Market

•How many? How are they concentrated?

•How available is the prdouct?

•What's going on in the supplier's market?

Suppliers

•Identify customer segments (age, gender, martial status, etc.)

•Identify distribution channels

•Identify customers' price preferences

Customers

•Are competition entering or exiting the sector?

•Is the sector/industry consolidating? (M&A)

•What are the major barriers for entering/exiting?

•What are the subsitutes?

Future

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BUSINESS SITUATION AWARENESS

The business situation framework is one of the most frequently used structures. It is extremely useful as an X-ray of a business. If there are grossly overlooked issues, they will likely reveal themselves in the business situation framework.

You will often find that in order to accurately respond to certain items within this framework, you’ll have to branch out to other structures. This is perfectly fine, as, by design, you should think through all of the issues before committing a single word the page, anyways.

FIGURE 5. BUSINESS SITUATION FRAMEWORK

•Identify your customers

•What does each customer segment want?

•What price is each segment willing to pay?

•Are you serving another business or customers?

•What distribution channels do your customers prefer?

•How are customers concentrated?

Customer

•What is your product/service?

•Is it commodity goods or differentiable goods?

•What are the complementary and substitute goods?

•At what stage of its life cycle is the product?

Product and services

•What are your expertises and capabilities?

•What distribution channels do you plan to use?

•What are your intangibles?

•How is your financial situation?

Company

•Identify your competitor's behaviours and best practices.

•Identify your competition's concentration and barriers to entry

•Identify all relevant regulatory policies

Competition

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PRICING STRATEGY

A section of your business plan should be dedicated to a discussion of your pricing strategy. This is why.

A business has four main functions to increase profits. McKinsey’s study of the Global 1200 found a 1% price increase, assuming demand remained constant, operating profits increase on average by 11%. A 1% increase at Sears would raise profits by 155%.

A good look at pricing, on the other hand, could pay real dividends. Consider the impact. For a typical firm, the numbers look like this:

1% increase in average prices leads to 11.7% increase in operating profit 1% reduction in variable costs leads to 7.3% increase in operating profit 1% increase in sales volume leads to 3.7% increase in operating profit 1% reduction in fixed cost leads to 2.7% increase in operating profit

1. A McKinsey study of Fortune 1000 companies showed that, on average, a 1% price cut

lowers operating earnings by 8% (assuming no change in volume or costs). 2. Another composite study of 500 companies across multiple industries showed the

relative impact on operating income of price and three other business variables (see Figure 3.2).

FIGURE 6. THE LEVERAGE OF PRICE AND PROFIT SOURCE: MICHAEL MARA AND ROBERT RORIELLO, “MANAGING PRICE, GAINING PROFIT,” HARVARD BUSINESS REVIEW (SEPTEMBER–

OCTOBER 1992): 85.

The pricing strategy is one of the most strategic also tactically demanding aspects of your business plan, and it must reflect your business development objectives. The price range of your product and service will reflect your brand’s price image, improve your margins, create more profitable promotions, and better match supply and demand.

How much do you plan to charge, and why? How will you use pricing strategy to increase your sales and improve your margin? There are a number of pricing strategies at your disposal: cost-plus pricing, competitive benchmarking, value-based pricing, skimming, and bundling.

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FIGURE 7. PRICING STRATEGY FRAMEWORK

•Calculate the total cost of each step in the value chain (manufacturing, distribution, sales, and marketing), then add your desired margin

Cost-plus pricing

•Compare the price of your product to similar products on the market

Competitive Benchmarking

•Set the price of the product as the value delivered to the customer, regardless of historical/competition pricing

Value-based pricing

•Use limited-release opportunities to win special business from cost-conscious customers

Skimming

•Once a sale is achieved, add additional items to your basic item at a discount

Bundling

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PROFITABILITY FRAMEWORK

This framework is a powerful numerical issue tree that will break your profit down into its two components: revenue and cost. In order to make the most out of this framework, you should further segment each component.

FIGURE 8. PROFITABILITY FRAMEWORK

Profits

Revenue

Revenue per unit

# of units sold

Cost

Cost per unit

Fixed cost

Variable Cost # of units

sold

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CONCLUSION

In this paper, we identified several errors that are frequently made by entrepreneurs in

their business plans. These errors are caused by not rigorously frame the issue before

starting to write the plan. White Forest Consulting recommends entrepreneurs to use

frameworks to properly structure and develop issues before committing them to writing.

This process offers the capability to:

1) Thoroughly develop the client’s business ideas; 2) Encourage consistent and rigorous thinking and analysis; 3) Reveal weaknesses in business models to allow for self-diagnosis;

We also introduced a number of generic as well as specialized frameworks that

entrepreneurs could use as the basis for the development of their specialized business

plans. To use these frameworks properly, we recommend the entrepreneurs to:

1) Use a top-down approach; 2) Use analysis to justify your objective and goals; 3) Base all assumptions on facts; 4) Reach reasonable bounds for your estimates.

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ABOUT WHITE FOREST CONSULTING AND AUTHOR

White Forest Consulting Ltd. is a Vancouver, BC based boutique consulting firm, with expertise in providing startup and business development consultation and management services.

We welcome you to browse through our publications library located at http://www.white-forest.ca for additional publications that might be of interest. You may also post questions and comments regarding the contents of this whitepaper on our message board, located at http://white-forest.freeforums.net/.

This paper was prepared by Mo Zhang. Mo has a B. Sci in Engineering from Cornell University as well as extensive background working in Fortune 500 Companies, consulting in Business Development, Process and Product R&D, Management Consulting, Statistical Consulting, and R&D Consulting.

If you would like consultation services on business startup & development, product differentiation, process R&D, or enterprise experimentation, please contact us by email at contact@white-forest.ca.