Hamid Bouchikhi

A framework for business planning

Hamid Bouchikhi Professor of Management and Entrepreneurship

ESSEC Business School

Hamid Bouchikhi

Agenda

Morning

Introduction to business planning

Movies and More

Market research

Afternoon

Work Life Agency

Business Model

One-to-one coaching

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I- Introduction

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Is formal business planning necessary to the success of a new venture? Not always

Producing a BP doesnt guarantee success and starting without doesnt necessarily lead to failure

Producing a formal BP may not be the best use of your time if: You can jump start the venture with little or no resources The business is familiar and simple The risks are low

However a BP is necessary if and when you need significant outside help

And can help you to: Anchor your ideas in the real world Identify the challenges and risks ahead Break a complex project into more simple tasks Create a time line and a logical sequence for decisions Overcome potential objections React to contingencies

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Plans are unimportant. Planning is

essential. Dwight D. Eisenhower,

US President and D-Day Leader

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Who should you develop a BP for?

Yourself

Resource providers

Business partners

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What is a business plan?

Evidence of a value creation opportunity and a plan to exploit it

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The BP should prove that: There is actual or potential solvent and addressable demand for

some products or services that is not entirely or effectively served by current suppliers;

The entrepreneurs will be able to: Articulate a compelling value proposition,

Make and deliver the products or services,

And sell them,

With a profit

Thanks to a sound strategic positioning and an efficient management structure;

The profits will match or exceed the cost of capital;

The entrepreneurs have the skills and legitimacy to lead the new business;

The entrepreneurs can be trusted to cope with contingencies.

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What a BP is not or should not be

A nice powerpoint presentation and a sophisticated Excel model without substance;

A post hoc rationalization of pre-conceptions (backward business planning);

Good business planning is a discovery and learning journey

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Business idea

Market Research

Foundations

Growth

Financial Plan

Business model

A stepwise business planning methodology

Entrepreneurial team

Specification of cost and revenue components

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The ingredients of a good BP Thorough market research;

Creativity in the formulation of a business model;

Rigor in the implementation of the business model;

An ambitious and realistic growth plan;

A plausible financial plan fed by realistic numbers and estimates.

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How to proceed? 1. There is no standard Business Plan template applicable to all kinds of projects; 2. The Business Plan must communicate the uniqueness of the project and the

team; 3. The BP must be developed from the particular profile of your project:

Amount of resources needed Complexity Degree of innovativeness Risk level Key success factors in the sector Expected objections from the receivers of the plan, etc.

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Resources Business Plan Pro

A generic business plan model and numerous examples of Business Plans are available at (www.paloalto.com), free of charge.

The business plan generation software (Business Plan Pro) can be purchased online.

Cap Alpha A free downloadable business plan generation software developed by

the Centre Europen dEntreprises et dInnovation of Montpellier (www.business-plan-capalpha.com/defaut.php).

English version available.

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II-Market research

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Business idea

Market Research

Foundations

Growth

Financial Plan

Business model

The business planning process Entrepreneurial team

Specification of cost and revenue components

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Why do you need market research?

Evidence of a value creation opportunity

Market research must prove that: The market is attractive

And there is space for a new entrant to build a profitable and sustainable business

A good BP is first and foremost a good market research

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Outcomes of a good market research Assessment of market attractiveness

Opportunities and threats Key success factors

Market segmentation and prioritization of market

segments

Input for revenue and cost forecasting Good market research creates the foundations for

business planning

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What should you study? The demand side

The supply side Entrepreneurs often overestimate demand and

overlook competition

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A crucial step

Setting the boundaries of the target market

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Getting started

Write down your initial ideas (V0 of your BP) And design the adequate market research to test, refine or change

your initial assumptions.

Your offer (push) The 4Ps: product, price, distribution, promotion and branding

Supply chain and capacity building

Cost, margins, investment requirements

Your market (pull) Target customers (who should buy?)

Market size (how many?)

Customer benefits (why should they buy?)

Willingness to pay (how much they are willing to pay?)

Competition and your competitive advantage

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The supply side Current level and expected evolution of supply

Entry barriers

Current competitors: pricing, business models, cost structures, distribution of market shares, profitability.

Competitors view of the world and of themselves, goals, strategies, performance, strengths, and weaknesses, potential reactions to new entry, etc.

Current or potential substitutes

Who are the suppliers to the sector and how powerful they are?

Who captures value in the value system?

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The demand side

Current level and evolution of demand

Potential, solvent, and addressable demand

Customers needs, expectations, and preferences

Unfulfilled or ill satisfied needs

Customers budget for your products/services

Customers buying behavior: options and trade-offs

Identification and analysis of market segments

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Market segmentation Barriers and risks

Attractiveness

Low High

Low III

Learning value?

IV

Why bother?

High I

Where you should

go first

II

Challenging but

rewarding

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Market research methods

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Research methods Secondary research (Second hand data)

Databases: Factiva, BSP, Orbis, Thomson Financials

Market research reports: Xerfi, Euro Data Monitor

Websites

Official statistics: INSEE in France, EuroStat, US Census Bureau

Primary research (First hand data)

Qualitative

Quantitative

No business plan can rely only on secondary data

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Synthesizing your market research Data are just that

Interpretation makes all the difference

Not all collected data will be of equal interest/importance Sort the findings that will help you validate the market opportunity and

feed the business plan

Create simple and effective visuals (charts, diagrams, tables) to synthesize and communicate the findings of your market research

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Online resources www.dobney.com

A market research and strategic analysis company

You will find a concise presentation of the main market research techniques

And will be able to download free tools (e.g. questionnaire wizard)

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III- Business model

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Business idea

Market Research

Foundations

Growth

Financial Plan

Business model

The business planning process Entrepreneurial team

Specification of cost and revenue components

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The foundations of the new venture Vision

Mission

Ambition

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Vision

Your long term view of where the world is going

Societal, technological, economic, consumer trends

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Mission A concise, compelling mission statement

defines your reason of being

Our mission is to organize the world's information and make it universally accessible

and useful.

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Ambition

What are your primary goals?

Self employment

Wealth

Growth

Power

Independence

Passion for a field

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Business model (definition)

A business model describes the value an organization offers to various customers and portrays the capabilities and

partners required for creating, marketing, and delivering this value and relationship capital with the goal of

generating profitable and sustainable revenue streams.

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How?

(Infrastructure)

Who?

(Customers)

What?

(Offer)

?

(Finance)

Business model (building blocks)

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VALUE

PROPOSITION

COST

STRUCTURE

CUSTOMER

RELATIONSHIP

TARGET

CUSTOMER

DISTRIBUTION

CHANNEL VALUE

CONFIGURATION

CORE

CAPABILITIES

PARTNER

NETWORK

REVENUE

STREAMS

gives an overall view of a

company's bundle of

products and services

portrays the network of

cooperative agreements

with other companies

describes the channels to

communicate and get in

touch with customers

describes the arrangement

of activities and resources

explains the relationships a

company establishes with

its customers

sums up the monetary

consequences to run a

business model

describes the revenue

streams through which

money is earned

describes the customers a

company wants to offer

value to

outlines the capabilities

required to run a

company's business model

INFRASTRUCTURE CUSTOMER

OFFER

FINANCE

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VALUE

PROPOSITION

COST

STRUCTURE

CUSTOMER

RELATIONSHIP

TARGET

CUSTOMER

DISTRIBUTION

CHANNEL VALUE

CONFIGURATION

CORE

CAPABILITIES

PARTNER

NETWORK

REVENUE

STREAMS

gives an overall view of a

company's bundle of

products and services

portrays the network of

cooperative agreements

with other companies

describes the channels to

communicate and get in

touch with customers

describes the arrangement

of activities and resources

explains the relationships a

company establishes with

its customers

sums up the monetary

consequences to run a

business model

describes the revenue

streams through which

money is earned

describes the customers a

company wants to offer

value to

outlines the capabilities

required to run a

company's business model

INFRASTRUCTURE CUSTOMER

OFFER

FINANCE

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Customers

Make trade-offs between segment value and entry barriers/risks

A start-up can hardly address more than one market segment Unless generously funded

Build the first phase of the BP on the most attractive or accessible market segment Use other segments as opportunities for future growth

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Value Low High

Low 3 Learning value?

1 This is where you

should aim first

High 4 Dont waste your

time

2 High risk-high

reward segments

Barriers

Prioritizing market segments

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Value proposition

Define precisely your value proposition A fuzzy VP: Our offer will reduce dramatically the cost of

maintainance for our customers

A defined VP: We offer aircraft engine owners a software enabled solution to help them cut their maintainance cost by 20%

Specify your competitive advantage Monopoly? Cost leadership? Differentiation?

Articulate the 4Ps Product Price Place (channels) Promotion

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Competitive advantage

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The Value Chain

Firm infrastructure

Human resource management

Technology development

Procurement

Inbound

logistics

Operations Outbound

logistics

Marketing

and sales

Service

Support

activities

Primary activities

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Analytic approach

Minimizing the cost of individual activities in the value chain

Scale

Cost sharing

Experience

Relocation of activities

Integration up and/or downstream

Example: Low cost airlines, distance learning

Competitive advantage through cost leadership

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Systemic approach

Reconfiguration of the value chain

New business model (Cristaline Spring water)

Competitive advantage through cost leadership

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Selling products/services at a premium

By

Improving customers performance

Or

Reducing total cost for customers

Competitive advantage through

differentiation

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Analytic approach

Build uniqueness through selected elements of the value chain

Brand management

Delivery time

After sales service (Caterpillar)

Financing (GE)

Competitive advantage through differentiation

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Systemic approach

Inventing a new value chain

A new business model: Apple iTunes, Amazon Kindle...

A creative restaurant concept: Chuck E Cheeses

A holistic entertainment concept: Bang&Olufsen

Competitive advantage through differentiation

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Revenue model(s) and customer relationships

Revenue models

Selling goods or services

Pay-per-use

Subscription

Customer relationships Customization level of products or services

Service levels

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III-Business Model

Organizational design and action plan

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VALUE

PROPOSITION

COST

STRUCTURE

CUSTOMER

RELATIONSHIP

TARGET

CUSTOMER

DISTRIBUTION

CHANNEL VALUE

CONFIGURATION

CORE

CAPABILITIES

PARTNER

NETWORK

REVENUE

STREAMS

gives an overall view of a

company's bundle of

products and services

portrays the network of

cooperative agreements

with other companies

describes the channels to

communicate and get in

touch with customers

describes the arrangement

of activities and resources

explains the relationships a

company establishes with

its customers

sums up the monetary

consequences to run a

business model

describes the revenue

streams through which

money is earned

describes the customers a

company wants to offer

value to

outlines the capabilities

required to run a

company's business model

INFRASTRUCTURE CUSTOMER

OFFER

FINANCE

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Designing the organization

What are the key processes and activities required for effective operation of the business?

What are the capabilities (assets and competencies) required to perform them?

Which capabilities will be built internally and which will be contracted out?

How to coordinate the capabilities for efficient operation of the key processes and activities?

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Build internally or outsource?

When should you develop a set of capabilities internally? Market failure

Transaction cost economics

Value appropriation

Competitive advantage

Transitional arrangements Build internally before outsourcing

Outsource before building internally

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Orchestration: key policies

Marekting and sales policy Emphasis on the Go-to-Market

Manufacturing and supply chain management Sourcing policies, delivery, returns, after sales services.

Intellectual property In-house R&D, licensing-in and licensing-out strategy

Human Resources Management Recruitment, training, compensation, retention

Financial policy Emphasis on working capital and cash management

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Key partnerships

No business venture can succeeed without a coalition

Whose contributions are needed to the success of your business?

How will you bring them on-board and benefit from cooperation with them?

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IV- Growth plan

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Business idea

Market Research

Foundations

Growth

Financial Plan

Business model

The business planning process

Entrepreneurial team

Specification of cost and revenue components

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Specify your growth plan

Target size (in sales volume, number of outlets, market share) and pace of growth

Sequence of deployment in different geographical markets (or market segments)

Mode of growth:

Organic, acquisitions, alliances

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Size and growth pace Target size

Growth by choice or necessity?

Pace of growth

How to choose the right pace?

Growth scenario

Products/markets matrix in time

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Modes of growth Organic

Acquisitions

Partnerships

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The action plan The management team

Start-up logistics: office space, equipment, etc.

Project management and scheduling

What, when, who, where

Capability building plan and sequencing of investments

Human resources: recruitment forecasts and costs

Financial needs and timing of fund raising: amounts and timing

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Criteria for assessing an action plan

Completeness

Consistency

Sequencing and timing of decisions

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Risk analysis An aspect that is often ignored by over

optimistic entrepreneurs

What could go wrong?

Internally

Externally

How would you respond?

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VI- The financial plan

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Purpose?

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Purpose?

Proving the value creation potential

of the new venture

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A business is viable if

Revenue > Cost

in the long term

and

(Revenue-Cost) >= Cost of capital

and

Has enough cash to meet short term commitments

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The cost of capital The cost of capital is not a given

It reflects the mix of debt and equity

Where V is the total amount of funds, E is equity, Re is the cost of equity, D is debt, Rd is the cost of debt, and Tc is the tax rate.

Why should entrepreneurs prefer debt to equity?

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Financial policy

Amortization policy

Growth financing policy Gradual growth through self funding or swift growth through outside

funding?

Setting the debt and equity mix Respective advantages and pitfalls: reducing the cost of capital or

retaining cash flows?

Compromise: convertible debt but be careful what you are signing for.

Phasing of fund raising The WACC should decrease with success

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Forecasting revenue and cost

Revenue and cost forecasts should reflect the findings of market research, strategic positioning, growth plan and implementation roadmap Beware of the if we could only capture X% of the market shortcut.

If multiple revenue and cost streams, provide a break down

Cost forecasts should be more accurate and logically derived from your revenue projections.

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Financial statements to include in the BP

Profit and Loss (P&L) statement Profitability

Cash flow statement Liquidity

Balance sheet and financing plan (origin and use of funds) Solvency

Sensitivity analysis

Advice: create your own Excel model

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Value creation indicators Break-even analysis

EBIT (Excdent brut dexploitation)

Pay back

Net Present Value (NPV or Van)

Internal Rate of Return (IRR or TRI)

About NPV (or IRR) calculation Expected cash flows?

Discount rate?

Terminal value?

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The Business Plan

Reality (when things go well)

On financial forecasts (I)

Cumulative cash flows

Time

The actual hole is almost always deeper and wider than the

forecast

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On financial forecasts (II)

Consistency with strategy and operating plan

You must be able to provide qualitative justification of the numbers

Do not underestimate the required capital to show a good profit outlook

When funding needs are high, break the project in successive phases (real options)

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At the end of the day

Do you want to be a big fish in a small pond or a small fish in a big pond?