Business Plans:Business Plans:Seeing Audiences and Your Business Clearly

ObjectivesObjectives• Understand why and when to develop a

business plan• Know how to tell the business plan story• Learn the major sections of the classic

business plan• Focus business plan sections to meet specific

needs• Identify the major risks to business plan

success• Master presenting your business plan to

others

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A business plan is a…A business plan is a…a) 5-10 word sentence or taglineb) Document designed to detail major characteristics of a firmc) A paragraph that describes the firm’s goals and

competitive advantagesd) A 30-second action-oriented description of a

business designed to sell the idea of the business to another

QuestionQuestion

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Business Plan BackgroundBusiness Plan Background• Business planBusiness plan: document designed to detail

major characteristics of a firm• 2 circumstances when a business plan is

necessary:– External legitimacy

– Internal understanding

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• External legitimacyExternal legitimacy: extent to which a small business is taken for granted, accepted, or treated as viable by organizations or people outside the small business or the owner’s family

• Internal understandingInternal understanding: extent to which employees, investors, and family members in the business know the business’s purposes and operations

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Starting Small and Building UpStarting Small and Building Up

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• The Vision StatementThe Vision Statement– 5-10 word sentence or tagline

• TaglineTagline: memorable catchphrase that captures the key idea of a business

• Good way to present a vision statement

– MicrosoftMicrosoft: “A computer on every desk, running Microsoft software.”

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• The Mission StatementThe Mission Statement– A paragraph that describesdescribes the firm’s goals

and competitive advantages– Talks in terms of how it will make a

differencedifference in for the customer or the industry– Fantastic Gift BasketsFantastic Gift Baskets: “The family at

Fantastic Gift Baskets puts the same care and love into designing our gourmet gift baskets as you would…if you had the time!”

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• The Elevator PitchThe Elevator Pitch– A 30-second action-oriented description of a

business designed to sell the idea of the business to another

– Leads with the hookhook, follows up with purposepurpose of the service, ends with where businessbusiness is now

– What makes firm unique or superior?– Sounds like a sales pitch

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The 30-Second Business Plan• “Elevator pitch"--a carefully prepared, well-

rehearsed summary of who you are, what you do and why you are better at it than anyone else

• Verbal equivalent of your business card, but it needs to say much, much more, and it needs to say it very quickly

• Practice, practice, practice - You never know when you will need your elevator pitch

ExampleExample

http://www.entrepreneur.com/money/financing/article58946.html 8-10

• The Executive SummaryThe Executive Summary– KeyKey component of the written business plan– One- to two-page (250-500 word) overviewoverview– Product, market, competitive advantages,

management, business, finances– Single most importantmost important written part of plan

• Most widely distributed

• Readers typically start with executive summary

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The Classic Business PlanThe Classic Business Plan• Full (or classic) business planFull (or classic) business plan: 25 single-spaced

pages of text and 15 pages of financials and appendices

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Business Plan OutlineBusiness Plan Outline• Cover letterCover letter: one page document on business

stationery– Introduces business plan and owner

– Indicates why recipient is being asked to read the plan

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• Title PageTitle Page: contains introductory information– Company name– Contact information– Date this version of the plan was completed– Proprietary statement to protect your ideas– Possible items:

• Securities disclaimer

• Name of person who prepared the business plan

• Notice of copyright for the plan, or brands/logos

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• Table of contentsTable of contents:– Lists major section headings

• Boldface type

– Sections underneath major sections• Normal type

– Put page numbers on every page of the business plan

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• The CompanyThe Company:– CompanyCompany descriptiondescription: 1-2 pp.

• Vision statement / mission statement

• Specific goals

• Company backgroundbackground: brief description of the company, the firm’s current status, and the history of the business

• Business’ competitive advantageadvantage

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• The CompanyThe Company:– Product/service and industryProduct/service and industry: 1-8 pp.

• Describe firm’s product or service

• Include pictures

• Explain how the customer uses the product

• Proprietary technology

• Industry descriptions

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• The MarketThe Market:– Market and target customerMarket and target customer: 1-3 pp.

• Total population of people or firms you plan to sell to

• Target customer section: focuses attention on who would buy

– Demographics’ relation to the product, how often they buy, and past experience

– Common to have multiple target audiences

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• The MarketThe Market:– Competition and competitive advantage: 1-2 pp.

• TableTable: 1 p.– Major competitors– Competing product or service: market share, price,

competitive advantages and disadvantages

• TextText: 1 p.– what makes product or service unique

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• The MarketThe Market:– Marketing strategyMarketing strategy: 1-3 pp.

• Overall strategy your firm pursues in the market

• Sales plan that shows specific ways you apply strategy to secure sales from your customers

• Longer-term competitive plan that shows how you protect your firm from efforts of the competition to unseat you

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• The OrganizationThe Organization:– Legal and organization structuresLegal and organization structures: 1/2-1 p.

• Legal form of the business

• Organizational structure of the firm

• Makes clear how many employees there are and whether they are full time or part time, permanent or seasonal, family or non-family

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• The OrganizationThe Organization:– Key personnelKey personnel: 1/2-3 pp.

• Sell the most important single element in the business plan – you!

• Who are your key personnel?

• Talk about accomplishments rather than just experience

• Do not limit yourself to business

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• The OrganizationThe Organization:– Related service providersRelated service providers: 1/2-1 p.

• Identify your bank and banker, attorney and legal firm, accountant or bookkeeper, other consultants

• Major relationships established with well-known suppliers or customers

• Board of directors / board of advisors

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• The OrganizationThe Organization:– LocationLocation: 1/2 p.

• Description of the facility

• How it meets strategic and sales goal of the business

• Own, lease, or rent the property

• Plan to expand the facilities

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• The FinancialsThe Financials:– Page 1Page 1: Critical assumptions– Page 2Page 2: The deal (if the plan is going to

investors)– Page 3Page 3: Income statement for Year 1, by

month; assumptions marked by footnotes– Page 4Page 4: Income statement for Year 2, by

month, and Year 3 (and later if needed) by year; assumptions marked with footnotes

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• The Organization:– Page 5: Cash flow statement for Year 1, by

month; assumptions marked with footnotes– Page 6: Cash flow statement for Year 2 by

month, and Year 3 (and later if needed) by year; assumptions marked with footnotes

– Page 7: Balance sheet for years 1-3 (or 1-5) by year; assumptions marked with footnotes

– Page 8: Start-up cost budget– Page 9: Assumptions page for financial

statements

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• The AppendicesThe Appendices:– Most popular appendix: one-page version of

owner’s resume– Product or service pictures or specifications– Copies of signed contracts– Results from marketing studies or pilot sales

efforts– Industry reports– Price lists for products or services– Advertising copy

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QuestionQuestionWhat is it called when a business is

operating prior to writing a plan for it?a) Pioneering businessb) New Entrant businessc) Existing businessd) Operational Plan

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Focusing Your Business PlanFocusing Your Business Plan• Pioneering businessPioneering business: product is truly new

• New entrant businessNew entrant business: product or service already exists– Firm is first of its kind in your market

• Existing businessExisting business: entrepreneurs start a business before they write a plan for it

• Business with significant government Business with significant government involvementinvolvement: zoning, environmental impact

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• Screening planScreening plan: basic overview of the firm and detailed look at the financials

• Information plansInformation plans: gives potential customers or suppliers information about the company and its product or service

• Proof-of-concept websiteProof-of-concept website: internet-based type of plan designed to solicit information on customer interest

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• Invention planInvention plan: provides information to potential licensees

• Operational plansOperational plans: used as working document within a business– Includes detailed specifications of the major

techniques, methods, recipes, formula, and sources used by the firm to do its work

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Critical RisksCritical Risks• Overstated numbers• Uncertain sales (especially conversion rates)• Overlooked competition• Experience deficits• Inadequate cushion• Inadequate payback

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• Circle of advisorsCircle of advisors:– Review the plan and help identify the critical

risks and your coverage of them

• Service Corps of Retired Executives• Small Business Development Center• Ibis Associates• Kauffman Foundation’s Business EKG

website• BizStats

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How long should your business plan take to How long should your business plan take to present?present?

a) 10-15 minutes with 15 minutes of questions

b) 5 minutes with 5 minutes of questions

c) 20 minutes with 5 minutes questions

d) Open discussion about plan lasting 20 minutes

QuestionQuestion

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Presenting Your PlanPresenting Your Plan• Plan presentations usually last 10-15 minutes10-15 minutes

– 15 or more minutes for questions

• Key thingsKey things:– Your passion for your business

– Your expertise about the business and the plan

– How professional you are in your work

– How easy it would be to work with you

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Small Business Strategies:Small Business Strategies:

Imitation with a TwistImitation with a Twist

Objectives:Objectives:• Learn the decisions needed to establish a foundation

for strategic planning

• Learn the forms of imitative and innovative businesses

• Articulate the benefits that win over customers

• Use SWOT analysis to identify strategic options

• Under the major strategies of business-differentiation, cost, and focus

• Use value chain analyses to apply strategy throughout the firm

• Learn how to sustain competitive advantage through attracting customers and discouraging competition

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Strategy in the Small BusinessStrategy in the Small Business

• StrategyStrategy: the ideas and actions that explain how a firm will make its profit– Good strategy leads to greater chancesgreater chances for

survival and higher profits for small businesses

– What makes a strategy “good”“good” is its fit to the particulars of your business and the resources you can bring to it

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The Small Business Strategy ProcessThe Small Business Strategy Process

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1.1. Prestrategy: First Step of Strategic Planning Prestrategy: First Step of Strategic Planning• Goal is deciding on product or serviceproduct or service you intend to offer

and the general nature of your intended market• IndustryIndustry: general name for line of product or service

being sold, or the firms in that line of business

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• IndustryIndustry– Key is selecting an industry that offers good

potential for making a profit– Also needs to offer attractive opportunities to

work with a minimum of risk and competition– http://www.census.gov/epcd/naics02/– Trade associationTrade association: group of people in the

same industry who band together to represent the industry to the public and government

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Question

The size of the market refers to:

a) scale

b) market mass

c) scope

d) niche

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• MarketMarket: business term for the population of customers for your product or service

• ScaleScale: size of the market – Mass or Niche

• ScopeScope: geographic range covered by the market– Local to Global

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• ScaleScale: most industries have both massmass and nicheniche markets– Mass marketMass market: large portions of the population

• Example: all men, all women, all teens, et al

• Mass market is broadbroad– Niche marketNiche market: narrowly defined segment of the

population that is likely to share interests or concerns

• Example: Hallmark vs. SimplyShe

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3 Rules for Niche Marketing• Niche marketing can be extremely cost-effective• Niche marketing can be a low risk way to grow your

business following 3 rules:– Meet their unique needs – Say the right thing – Always test-market

Example

http://www.entrepreneur.com/marketing/marketingcolumnistkimtgordon/article49608.html 7-46

• ScopeScope: locallocal or globalglobal– Can be local, regional, national, international,

or global– Scope is important for two reasons:

• Knowing your scope helps deciding where to focusfocus sales and advertising efforts

• Knowing your target market gives you a way to know which competitorscompetitors to worry about most, namely those within your market scope

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• Imitative strategyImitative strategy: doing more or less what others are doing– ClassicClassic small business strategy– Almost 2/32/3 of people starting business use this

approach– AdvantagesAdvantages: existing technologies, possibility to buy

existing businesses, customers already know what you are offering

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• Degree of similarityDegree of similarity: extent to which a product or service is like another– Imitation is not likely to matchmatch precision or

completeness or copying seen in franchising– Imitation plus one degreeplus one degree of similarity:

copying of existing businesses with the exception of one or two key aspects in hopes of improving them

• Pure innovationPure innovation: new product or service, also with a unique setting

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Tool: Industry AnalysisTool: Industry Analysis

• Industry analysisIndustry analysis (IA): a research process that provides the entrepreneur with key information about the industry, such as current situation and trends– Helps to estimate possible financial returns

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• Basics of Industry AnalysisBasics of Industry Analysis– SIC/NAICS number and description: online– Industry size over time: online– Profitability– How profits are made: interview or articles– Target market competitor concentration:

directory checking– Analysis– Sources

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2. Benefits: Second Step of Strategic Planning Benefits: Second Step of Strategic Planning• BenefitsBenefits: characteristics of a product or service that the

target customer would consider worthwhile (low cost or high quality)– Key decisionKey decision is deciding what benefits you plan to

offer to your customer

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Value Value BenefitsBenefits– Quality– Style– Delivery– Service

– Technology

– Shopping Ease

– Personalization

– Assurance

– Place

– Credit

– Brand/reputation

– Belonging

– Altruism

Cost BenefitsCost Benefits– Lower costs

– Scale savings

– Scope

savings

– Learning

– Organizationalpractices

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Leveraging Opportunities During EntryLeveraging Opportunities During Entry• 77 Entry WedgesEntry Wedges

– Supply shortages

– Unutilized resources

– Customer contracting

– Second sourcing

– Market relinquishment

– Favored purchasing

– Government rules

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What are the components of a SWOT analysis?a) small, working conditions, organization, timeb) social, weaknesses, opportunities, technologyc) strengths, weaknesses, opportunities, threatsd) segment, wealth, organization, technology

Question

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Tool: SWOT AnalysisTool: SWOT Analysis• SS: Strength

WW: WeaknessOO: OpportunityTT: Threat– SWOT looks critically at these factors– Used to organize and perform an analysis of your

company’s current and future resources and situations

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• SWOT: StrengthsSWOT: Strengths– Customers ready to buy– Specialized knowledge– Trade secrets– Patents, trademarks, copyrights– Brand or personal recognition– Prior self-employment experience– Prior sales experience

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• SWOT: WeaknessesSWOT: Weaknesses– Customers not ready to buy– Inadequate financial backing– Easy-to-copy business– Undistinctive product, service, or brand– Location or facility disadvantages– Lack of self-employment experience– Lack of managerial experience

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• SWOT: OpportunitiesSWOT: Opportunities (from entry wedges)– Supply shortages– Unutilized resources– Customer contracting– Second sourcing– Favored purchasing– Technology creating new products/services– New markets opening up

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• SWOT: ThreatsSWOT: Threats– Economic downturn– Oversupply– Competitive pressures– Supplier/customer pressures– Major supplier/customer loss– Missed window of opportunity– Negative government regulations or actions

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Inside the FirmInside the Firm

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SWOT AnalysisSWOT Analysis• Final stageFinal stage of SWOT analysis is to match it

against the benefits sought by your market• StrengthsStrengths should match or support the benefits• WeaknessesWeaknesses should not get in the way of

delivering the desired benefits

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Use SWOT to Kick-Start Your Planning• The SWOT analysis--evaluating strengths, weaknesses,

opportunities and threats--is one good way to start thinking strategically

• As you perform a SWOT analysis, try to involve other people; it improves the brainstorming value

• To clarify, strengths and weaknesses are about you and your company, its nature, history, and what it does and doesn't do well

• Threats and opportunities are external-- factors outside of your business

Example

http://www.entrepreneur.com/startingabusiness/businessplans/businessplancoachtimberry/article182034.html 7-63

Question

Which strategy is clarifying how one product is unlike another in a mass market?a) mass market strategyb) focus strategyc) cost strategyd) differentiation strategy

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Strategy SuggestionStrategy Suggestion• 3 Classic Strategies3 Classic Strategies

– Differentiation strategy: clarifying how one product is unlike another in a mass market

– Cost strategy: firm offers a combination of cost benefits that appeals to the customer

– Focus strategy: targets a portion of the market (segment or niche)

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• 7 Small Business Supra-Strategies7 Small Business Supra-Strategies– Craftsmanship– Customization– Super-support– Serving the underserved/interstices– Elite– Single-mindedness– Comprehensiveness

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Competitive Advantage• Resources: Any asset, capability, organizational

process, information, or knowledge that contributes to the firm’s performance– Tangible resources: easily identified

• Financial (cash), Physical (land)– Intangible resources: typically informational and

and expertise-based practices and routines that are not clearly evident

• Human (skill), Reputation (trust)

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• Organizational capabilities: abilities, skills, and competencies used by the firm to make profits from tangible and intangible resources

• Transformational competencies: firm can make its product or service better in value

• Combinational competencies: combining tangible and intangible resources– Vermont Bear Company’s Bear-GramBear-Gram

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• The VRIO AnalysisThe VRIO Analysis– Test 1: ValueValue – does the resource help you

increase sales or decrease costs– Test 2: RarenessRareness – is the resource rare

enough that you can charge more than competitors without the resource

– Test 3: ImitabilityImitability – can the competition imitate the resource

– Test 4: OrganizationOrganization – can the firm make use of the resource

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Entrepreneurial Strategy: Generating and Exploiting

New Entries

McGraw-Hill/IrwinEntrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

What is a New Entry?

• Offering a new product to an established or new market.

• Offering an established product to a new market.

• Creating a new organization.

Entrepreneurial Strategy: The Generation and Exploitation of New Entry Opportunities

Resources: Source of Competitive Advantage

• Basic building blocks to a firm’s functioning and performance.– Inputs into the production process.– Can be combined in different ways.– Provides a firm its capacity to achieve superior

performance.

• Resources need to be:– Valuable.– Rare.– Inimitable.

Creating a Resource Bundle

• Entrepreneur possesses ability to obtain and recombine resources.– Market knowledge: information, technology,

know-how/skills that provide insight to market/customers.

– Technological knowledge: information, technology know-how/skills that provide insight to create new knowledge.

Assessing Attractiveness: Information on a New Entry

• Prior knowledge and information search– More knowledge ensures a more efficient

search process. – Search process represents a dilemma for an

entrepreneur. – Costs: both money and time.

• Window of opportunity– Period of time when the environment is

favorable for entrepreneurs to exploit a particular new entry

Comfort with Making a Decision under Uncertainty

• Dilemma arising from the trade-off between more information and the likelihood of closure of the window of opportunity.– Error of commission: negative outcome

from acting.– Error of omission: negative outcome

from not acting.

Decision to Exploit or Not to Exploit the New Entry Opportunity

Strategy for New Entry: First-Mover Advantages

• Develop a cost advantage. • Face less competitive rivalry. • Can secure important channels. • Better positioned to satisfy customers. • Gain expertise through participation.

First Mover (Dis)Advantages (1 of 2)

• Demand uncertainty: difficulty in estimating– Potential size of the market.– How fast it will grow.– Key dimensions along which it will grow.

• Technological uncertainty: difficulty in assessing– Whether the technology will perform.– Whether alternate technologies will

emerge and leapfrog over current technologies

First Mover (Dis)Advantages (2 of 2)

• Adaptation: difficulty to adapt to the new environmental conditions.

• Customer uncertainty: difficulty in accurately assessing whether the new product or service provides value for them.– Overcoming customer uncertainty:

• Informational advertising.• Highlight product benefits over substitutions.• Create frame Of reference for potential

customer.• Educate customer- set industry standard,

customer loyalty.

Lead Time and First Mover

• Lead time: grace period in which the first mover operates in the industry under conditions of limited competition.

• Creating barriers to entry for competition:– Building customer loyalties.– Building switching costs.– Protecting product uniqueness.– Securing access to important sources of

supply and distribution.

Risk Reduction Strategies

• Risk: probability of, and magnitude of, downside loss.

• Derived from entrepreneur’s uncertainties over:– Market demand.– Technological development.– Actions of competitors.

• Two such strategies:– Market scope.– Imitation.

Market Scope Strategies: Narrow Scope

• Scope: choice about which customer groups to serve and how to serve them.

• Narrow scope: offers a small product range to a small number of customer groups to satisfy a particular need.– Focuses on producing customized products,

localized business operations, and high levels of craftsmanship.

– Focuses on a specific group of customers.– High-end of the market represents a highly

profitable niche.

Market Scope Strategies: Broad Scope

• Offers a range of products across many different market segments.– Strategy emerges through the

information provided by a learning process.

– Opens the firm up to many different “fronts” of competition.

– Reduction of risks associated with market uncertainties.

Imitation Strategy

• Involves copying the practices of other firms.– Cannot be rare or inimitable.

• Why Do It?– Minimizes risk of downside loss associated with a new

entry.

• Advantages:– Easier to imitate the practices of a successful

firm.– Can help develop skills necessary to be

successful in the industry.– Provides organizational legitimacy.

Types of Imitation Strategies

• Franchising: focuses on imitation to reduce the risk of downside loss for the franchisee.

• “Me-too” strategy: copying products that already exist and attempting to build an advantage through minor variations.– Might be more difficult to successfully

implement than initially expected– Can potentially:

• Reduce the entrepreneur’s costs associated with R&D.

• Reduce customer uncertainty over the firm.• Make the new entry look legitimate from day

one.

Managing Newness

• Liabilities of newness arise from unique conditions:– Costs in learning new tasks.– Conflict arising from overlap or gaps in responsibilities.– Establishing formal and informal structures of

communication.

• New firm need to:– Pay special attention in education and training

employees.– Help employees develop knowledge and skills

quickly.– Foster activities to foster informal relationships

and a functional corporate culture.

Assets of Newness

• Lack of established routines, systems, and processes provide a clean slate, giving a learning advantage.

• Heightened ability to learn new knowledge in a continuously changing environment.

• Flexibility and ability to accommodate new knowledge.