Pragmatic Introduction to writing a Business Plan

Pragmatic Introduction to writing a Business Plan

Feel free to contact me ∗1

Index1. The new company

2. Importance of patents

3. The role of the business plan

4. Content of the business plan

5. Contributions of analysis

6. Private funding

7. The funding through calls and laws

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Pragmatic Introduction To Writing A Business Plan

1. The new company

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The Company ecosystem

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The New CompanyThe New Company is mainly :

•IDEA - A Good Idea related to products or services• The idea is developed with the establishment of new business or by existing

companies that may be interested in the development of existing products or to diversify their activities. In all these cases the Idea needs to be deeply investigated

• Examples:• Low Cost Flights - no frills• Sony Walkman - portability

•SKILLS - Entrepreneurial skills• Spirit of initiative and creativity• Willingness to do• Organizational skills• Decision maker• Ability to deal with the Corporate risk• Leadership• Coordination skills

•IDEA and SUPPORTING FUNCTIONS are equally important

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The Startup phase• Design:• Business Plan• Identification of financial resources• Definition of legal form, corporate purpose, scope• Organizational Structure

• Execute:• Business startup

• Continuous monitoring, adjustment, revision, development

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Build your business plan on what the market will buy is always a better strategy and more successful than developing a new product or service without knowing exactly who will use it and hope to be bought because it is good.

If the needs is not required … before people realize that they need the new product, you often have to take a long time (and money) to "educate" about why they need it.

A Succesful Idea• What Products, Services• Why What are the needs met• Who Reference market• When ... business seasonal? subject to cycles of sale• Where regulations and limits• How What is the organization (partners, team, ..) and the

logistics

• ...• Investigate the needs of consumers to identify services and products • Analyze the technical characteristics, materials and production process• Identify headquarters, the necessary facilities and resources• Study for a better understanding of the Reference Market• Evaluate the regulations, rules and obligations• Collect data analytically and build a development plan• Identify partners and stakeholders inside and outside the company• Define the Activity Plan and milestones• Critically evaluate sales prospects• Identify and collect required private or public funding

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History of a success ... not only a good product

• An effective management team working in a cooperative way. Managers selected to provide a wide range of knowledge.

• Appropriate funding.

• Managers who take business decisions based on a clear understanding of the market and competition, rather than on their "love" for the product or services.

• Managers who follow best business practices, surrounding themselves with competent people and keep an open door to suggestions and ideas.

• Passionate entrepreneurs and their companies are able to communicate their enthusiasm to potential investors, clients and employees.

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Some Reasons of Failure• Not appropriate Business planning.

• Initial capital insufficient for the period of start-up and development stages, due to inadequate planning.

• Wrong estimate of the market demand for the product or the service.

• Lack of capacity in management.

• Failure to select and use appropriate external professional services.

• Inability to launch effectively market products or services.

• Too much dependence on a single individual or a particular event awaited.

• Error in estimating the necessary capital to support company growth.

• ... And … if you are successful ...

• The success in the sale of a product / service can mask the inadequacies of : Strategy, Management, Marketing channels, Dependencies on individual resources, Inappropriate Funding.

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Case Study - Sony – Walkman Source

Wikipedia... The first Sony Walkman was sold in 1979. Gradually, the Sony Walkman was sold so widespread that, the term '' Walkman '' becomes synonymous for “any portable cassette player”, although not produced by Sony . ... The word Walkman is Sony registered trademark. More recently, Sony has decided to capitalize on the popularity of the brand, attributing it to many other products that can play music, regardless of whether the support was an audio cassette or other.•A German inventor, Andreas Pavel, claimed to be the real father of the Walkman, given that in 1977 it would create a very similar device, called stereo belt. After several court battles in 1999, Sony and Pavel reached an extrajudicial agreement.

The Original Walkman•The first was the Walkman model TPS-L2, blue-silver, on sale in Japan in July 1979.•The Walkman allow the people the chance to take their music anywhere, the Walkman became one of the top sellers products of the 80's, becoming the icon of a generation. The Walkman were also dedicated the success of some pop music (like "Wired for Sound" by Cliff Richard), while the market quickly spread hundreds of clones. Often, in promotion campaigns, the Walkman was represented as the perfect companion for joggers or for lovers of roller-skating. Sony has sold more than 330 million Walkman, 150 of them in the US.

•The first Walkman was based on Pressman, a portable recorder used in the business world. While maintaining a similar appearance, however, the Walkman replaced with the ability to record a stereo playback capability and the ability to connect two sets of headphones (even if it was included in the package only one). Instead of the record Pressman button, the Walkman had a button "hotline", which allowed two hypothetical users, who were using two pairs of headphones, talking to each other through a small microphone. In the model of the next Walkman double audio output and the function hotline they were never implemented.

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Case Study - Sony – Walkman Source

Wikipedia

• ... In the late 90s there was a sharp decline in sales, especially in favor of portable CD players, and then of mp3 players.

A Minidisc player, Walkman branded• Sony initially attributed the Walkman brand to its Minidisc readers, a format in which

the company has believed in it. Despite the potential of new media, Sony focused excessively on the ATRAC format, losing sight of the potential of the MP3 format.

• So, trying in vain to promote to the market its new Minidisc Walkman, the company left the field open to its competitors, most notably Apple, on the other channels of portable music.

• The popularity of mp3 players, first of all the iPod, highlighted the strategic error of Sony that, in fact, definitively lost the leadership in the sector.

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Comment to the Sony Case

• A successful idea that fill a hidden customer need. At the beginning of the 80’s surveys did not highlights this hidden need of “music in mobility”. The average consumer would not have thought possible (accustomed to large radio and to correlate the sound quality with the size of compact speakers and music players).

• A claim of intellectual property remedied with settled out of court

• A top selling product that became a symbol of a generation that has made success in similar markets (songwriters) 350 million units sold!

• Ability to innovate a device from business-professional to consumer

• Attention to the market and the use – introduction of the hotline function

• Strategic error – Product Trap - the focus was to impose proprietary formats and media owners rather than follow the customer needs.

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The success is full of pitfalls ...


2. Importance of patents

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Intellectual Property• When you find or invent a new process you must ensure that there is sufficient

clarity on who will own the intellectual innovation

• Ensure that the invention is not spread to others, other than employees , or published until it has applied for a patent

• It is a must to put in place all the necessary measures to protect key resources

• Support, help and information for patents are available in public databases (eg. Ep.espacenet.com, www.uspto.gov, www.wipo.int)

• You can also refer to the Technology Transfer offices and to professionals who can help you avoid making small mistakes with big impacts

• Patents rules and processes are country specific. Patents is one of the components for your country Development index and are generally managed by specific offices that sometimes provides the first consultancy free of charge. ∗14

Patents and Industrial Property Protection

• A patent for an invention is granted by a government institution to the inventor, and gives, for a limited time, rights intended to prevent others from making, using or selling the invention without the permission of the inventor

• The success for the application requires at least that it is:• new (was not previously made public in any way)• innovative (the invention must not be obvious to someone with a good

knowledge of the industry)• have industrial utility

• A patent application to the national office is very cheap but the writing for the patent application is generally a complex task, best done by a specialized agent. Its cost may be about 3.000 to 6.000 Euros, depending on the complexity of the invention. The total cost for patents in Europe, USA and Japan normally exceeds 100,000 euro and therefore a lender should be found as soon as possible after the initial request

• The patent protection, if achieved, lasts 10-20 years from the date of the initial request to the national patent office ("priority date“). A yearly tax for renewal is can be requested after an initial period of 5 years.

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3. The role of the business plan

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...

• “If we could first know where we are, and whither we are tending, we could then better judge what to do, and how to do it.”

• Abraham Lincoln

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Business PlanThe business plan can be described as a document that summarizes the content and characteristics of an entrepreneurial project• plan to set up a new business• diversification of an existing business• Enforce and develop a business plan already started

GOALS•Tool for: Analysis, learning and control• The business planning performed by the entrepreneur and his

associates as an opportunity for learning and development of the business simulation before moving on the market

•Presentation tool• formalization of a business project when the initiative should be

submitted to shareholders or to third parties (New members or potential funders) for evaluation

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Entrepreneurial Formula

∗19A business plan is feasible if you can reach a balanced revenue-cost ratio within a reasonable period of time and then, to achieve a positive income result.

The Business Model

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The Business Plan• Translate business strategy into a detailed plan to create value• It allows to evaluate if there are sufficient resources to

achieve the strategy identified• It establishes a link between the economic and the main

indicators of strategy implementation

WHY IT IS USEFUL?• If you seek external financing, a business plan is a must!• If you are planning a self-financing, a business plan helps you

to define how much money you need to leave, you need to do when you have to do, and where you're heading

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External FundingThe Business Plan and the Executive Summary have an important role in the search for funding or partnership.

•A small percentage of the documents is read over the Executive Summary•A small percentage of the read proposals pass the initial selection•A small percentage of pre-selected passes the due-diligence and receives funding

Key factors for BP evaluation:•Management Team•Business Idea•Rating

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Drafting of the Business Plan

In order to draft the business plan may be more effective to turn to those who have no knowledge of the idea / product / service.

•Provides a critical and objective business view•It is not influenced by the “love for the product”•It performs quantitative analysis - not subjective•It is available to listen and advise•It helps to explain in a simple and jargon free•It has a 360 ° knowledge of markets and competition system

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4. Content of the business plan

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Business Plan in practice• The business plan must identify and motivate the choices

through qualitative and quantitative analysis.

• There is no a single pattern of “universal” Business Plan. every idea / company must analyze and describe the ecosystem.

• Much attention must be paid to the drafting of the executive Summary

• In the following pages is a list of possible arguments for the preparation of an operational plan in support of a business idea. ∗25

Business Plan Index 1/3• Summary of business project or “Executive Summary”• Project description• What products / services and the strengths and risks• Market opportunities to be seized• Main financial results• (What is required to the recipient of the business plan)

• The Company and Team• Location and history• Company type and Team• Financial data, linkages / collaborations/lobbying• The management team and key positions

• The product / service• Description of the need that you intend to meet• Description of the product / service and the "product system"• Presence of any licenses or patents• Stage of development of the product• Services and products, Complementary, Accessories

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Business Plan Index 2/3• Competition - Analysis of Sector

• Description of the structure of the offer• Status and degree of turbulence in the industry• Profile of the leading competitors• Identification of gaps between competitors• Identification / evaluation of substitutes

• The sales market• Description of the market and of its segments• Size and growth of demand• Identification and description of market segments selected• Bargaining power of customers target

• The market supply• Raw materials• Other resources• Characteristics of the market supply

• The marketing plan• Choices and pricing policies• Distribution channels and marketing arrangements• Export prospects• Sales budget

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Business Plan Index 3/3• The technical-industrial structure

• Description of the production structure• Production processes and "bottlenecks"• Analytical data regarding the equipment, their costs and their level of productivity• Processes and Resources• ICT support

• Organizational aspects• the company operating and its ramp-up• Logistics, warehouse and transport. Attention to perishability / obsolescence

• Network / alliances• Management• Partnership• Collaborations or projects / phases managed in synergy• Resources, production, trade, distribution, sales, ...

• Financial Projections (3 years)• Costs: Fixed Costs, Variable Costs, startup costs• Revenues: For sale Products / Services• Sources for financing funding• Break Even Point

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5. Contributions of analysis

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Market Analysis• What are the size and the potential growth of the target segments?• What are the drivers of growth in the various market segments?• What percentage of sales the entrepreneur expect from various product / services

and / or market segments?• How the new company achieves its customers?• What kind of competitors exist? How easy is it to imitate the business model of the

new company?• What are the entry barriers for competitors?• What is the process of purchasing and consumption?

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The Competitive ecosystem

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•Premium price differentiation: differentiated product (perfume) or undifferentiated (petrol)

•Customer criteria for evaluation

•Evaluate Product Anomaly e.g. Coca Cola in soft drinks: Real value vs. Perceived value

•Cost Structure Fixed vs. Variables - It is generally a sector structure•Economies of scale•Market access and supply•Conversion cost•Sector Profitability Rate

Other products that meet the same need: e.g. videoconference vs. business travel

Possible ChoichesMake, Buy, Connect

Market and Product

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Marketing Plan• For an accurate prediction of sales, companies need to consider many of the external and internal

variables as part of the analysis of the dynamics of a competitive market, including:

• macroeconomic factors• regulations• competitors' actions• customer demand• the mix and the pricing of the product categories• marketing programs• the introduction of a new product and the elimination of an existing product• changes to the characteristics and quality of the product• the production and distribution capacity• levels of customer service

• With the proliferation of the number and variety of products offered and the speed with which they are introduced, it is increasingly difficult for manufacturers and resellers to accurately predict sales. The accuracy of these estimates influence production plans and the level of the cost of the support functions. If actual sales are less than the expected level, you'll end up with excess inventory, with the risk of having to sell below cost; if actual demand exceeds the estimates, the company will lose potential revenue and customers, disappointed not to find the desired product available will be less satisfied.

• Businesses have faced this difficulty in different ways. Dell Computer Corporation has successfully developed the ability to respond very quickly to the actual demand of the customers. In 1997 it has disposal of stocks for only twelve days of sales. Other companies have taken steps to drastically reduce the number of products in the catalog, in order to simplify the planning process.

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Required resources• How the offer reach the customers?

• What are the sales targets (per year, per quarter)?

• What are the resources (quantity and quality) required to create products / services?

• How flexible is the organization?

• What are the experiences or the abilities of the team?

• What experience or abilities are lacking? How to find them?

• What are the main cost drivers∗34


6. Private funding

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Funding Types• Funding can come from various sources. The most appropriate

depends on many factors:• The business Stage• The forecast and results• The amount requested

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The two main types of financing are shares ("equity") and loans

SHARES: representing the capital of the company, and normally give full voting rights. Also carry the higher risk and potentially the highest remuneration because they are rewarded in terms of dividends after all other costs have been paid

LOANS: can be secured by the assets of the company. They are the first actions in the repayment of capital. Interest is at a fixed rate regardless of the profits or losses of the company.

A mixture of the two types is often appropriate

Shares• Equity investments affect the decisions of the founders of the

company.

• Founders and entrepreneurs• Contribute all they can afford• Provide grants to non-financial (waiving wage, local usufruct, etc.)

• Business Angel• Invest between 10,000 and 100,000 USD• Generate useful business contacts• They decide quickly

• Venture Capitalists (Early Stage)• Invest between 1,000,000 and 5,000,000 USD• They provide added value and not just funding• They decide not very fast, but they are very accurate in tests

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Loans• Friends and partners• They put everything they can invest• They provide grants to non-financial (waiving wage, local usufruct,

etc.)

• Banks• Invest between 10,000 and 1,000,000 USD• Require various guarantees (mortgages, etc.)• Decide slowly

• Public funding agencies• Invest between 100,000 and 5,000,000 USD• Provide easier loan conditions (low interest rates)• Decide very slowly ∗38

Crowfunding

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• From Wikipedia, the free encyclopedia

• Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, today often performed via internet-mediated registries, but the concept can also be executed through mail-order subscriptions, benefit events, and other methods. Crowdfunding is a form of alternative finance, which has emerged outside of the traditional financial system.

• The Crowdfunding model is based on three types of actors: • the project initiator who proposes the idea and/or project to be

funded; • individuals or groups who support the idea; • a moderating organization (the "platform") that brings the parties

together to launch the idea.

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Company Value – how to do it?- Equity method

- Simple- Complex

- Economic Income Based- Simple- Complex

- Mixed methodologies- Average value as the mix of methods and earnings

• Financial method

• Empirical methods (eg. Market multiples)- comparable companies- comparable transactions- subjective evaluation

- Innovative methods (eg. Economic Value Added)

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7. The funding through calls and laws

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Public Financing• Depending on your country of business startup many

opportunities should be available to access loans at a discounted price or facilities to buy equipment.

• Search on your local administration offices, regional and Country public registry

• Pay attention to the rules for accessing loans and rules for having refund. You have to follow them very strictly to avoid loss of rights.

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Examples: EU finance & Funding

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http://europa.eu/youreurope/business/funding-grants/access-to-finance/index_en.htm

http://europa.eu/youreurope/business/funding-grants/access-to-finance/index_en.htm

ENDDavide Cilano – email: davide.cilano gmail.com

Feel Free to contact ∗44

Small Business & Entrepreneurship

Pragmatic Introduction to writing a Business Plan