chapter 6: business plan copyright ©2012 pearson education, inc. publishing as prentice hall 6-1...

Chapter 6: Business PlanChapter 6: Business Plan Copyright Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall©2012 Pearson Education, Inc. Publishing as Prentice Hall 6-6-11

Conducting a Feasibility

Analysis and Crafting a Winning

Business Plan

Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-1

Chapter 6: Business PlanChapter 6: Business Plan Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall 6-6-22

Feasibility Feasibility AnalysisAnalysis

Entrepreneurs do not lack Entrepreneurs do not lack creative ideas, but…creative ideas, but…

Is a particular idea a viable Is a particular idea a viable foundation for creating a foundation for creating a successful business? successful business?

Feasibility study addresses the Feasibility study addresses the question: “Should we proceed question: “Should we proceed with this business idea?”with this business idea?”


Feasibility StudyFeasibility Study

NotNot the same as a business plan the same as a business plan Serves as a filter, screening out Serves as a filter, screening out

ideas that lack the potential for ideas that lack the potential for building a successful business building a successful business beforebefore an entrepreneur commits an entrepreneur commits the necessary resources to the necessary resources to building a business plan building a business plan

An investigative toolAn investigative tool

Industry and Industry and Market FeasibilityMarket Feasibility

Product or ServiceProduct or ServiceFeasibilityFeasibility

FinancialFinancialFeasibilityFeasibility

Elements of a Feasibility Elements of a Feasibility AnalysisAnalysis

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-4Chapter 6: Business Plan


Industry and Market Feasibility





Industry and Market Industry and Market Feasibility AnalysisFeasibility Analysis

Two areas of focus:Two areas of focus:

1.1. Determining how attractive Determining how attractive an industry is overall as a an industry is overall as a “home” for a new business“home” for a new business

2.2. Identifying possible niches a Identifying possible niches a small business can occupy small business can occupy profitably profitably


Five Forces ModelFive Forces Model

Five forces interact with one another Five forces interact with one another to determine the setting in which to determine the setting in which companies compete and, hence, the companies compete and, hence, the attractiveness of the industry:attractiveness of the industry:

1.1. Rivalry among companies in the Rivalry among companies in the industryindustry

2.2. Bargaining power of suppliersBargaining power of suppliers3.3. Bargaining power of buyersBargaining power of buyers4.4. Threat of new entrantsThreat of new entrants5.5. Threat of substitute products or Threat of substitute products or

servicesservices


Industry Competito

rs

Rivalry among existing

firms

Buyers

Bargaining PowerBargaining Powerof Buyersof BuyersSuppli

ers

Bargaining PowerBargaining Powerof Suppliersof Suppliers

Substitutes

Potential

EntrantsThreat ofThreat ofNew EntrantsNew Entrants

Threat of Threat of SubstituteSubstituteProducts or Products or ServicesServices



Industry Competito

rs


firms

Buyers


ers


Substitutes

Potential





Rivalry Among Rivalry Among CompaniesCompanies Strongest of the five forcesStrongest of the five forces Industry is more attractive when:Industry is more attractive when:

Number of competitors is large, or, Number of competitors is large, or, at the other extreme, quite smallat the other extreme, quite small

Competitors are not similar in size or Competitors are not similar in size or capacitycapacity

Industry is growing fastIndustry is growing fast Opportunity to sell a differentiated Opportunity to sell a differentiated

product or service existsproduct or service exists


Industry Competito

rs


firms

Buyers


ers


Substitutes

Potential





Bargaining Power of Bargaining Power of SuppliersSuppliers The greater the leverage of The greater the leverage of

suppliers, the less attractive the suppliers, the less attractive the industryindustry

Industry is more attractive when:Industry is more attractive when: Many suppliers sell a commodity Many suppliers sell a commodity

productproduct Substitutes are availableSubstitutes are available Switching costs are lowSwitching costs are low Items account for a small portion of Items account for a small portion of

the cost of finished productsthe cost of finished products


Industry Competito

rs


firms

Buyers


ers


Substitutes

Potential



Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-13

Chapter 6: Business Plan


Bargaining Power of Bargaining Power of BuyersBuyers Buyers’ influence is high when number of Buyers’ influence is high when number of

customers is small and cost of switching customers is small and cost of switching to a competitor’s product is low to a competitor’s product is low

Industry is more attractive when:Industry is more attractive when: Customers’ switching costs are highCustomers’ switching costs are high Number of buyers is largeNumber of buyers is large Customers want differentiated productsCustomers want differentiated products Customers find it difficult to collect Customers find it difficult to collect

information for comparing suppliersinformation for comparing suppliers Items account for a small portion of Items account for a small portion of

customers’ finished productscustomers’ finished products


Industry Competito

rs


firms

Buyers


ers


Substitutes

Potential






Threat of New Threat of New EntrantsEntrants The larger the pool of potential new The larger the pool of potential new

entrants, the less attractive an industry isentrants, the less attractive an industry is Industry is more attractive to new Industry is more attractive to new

entrants when:entrants when: Advantages of economies of scale are absentAdvantages of economies of scale are absent Capital requirements to enter are lowCapital requirements to enter are low Cost advantages are not related to company Cost advantages are not related to company

sizesize Buyers are not loyal to existing brandsBuyers are not loyal to existing brands Government does not restrict the entrance of Government does not restrict the entrance of

new companies new companies


Industry Competito

rs


firms

Buyers


ers


Substitutes

Potential





Threat of SubstitutesThreat of Substitutes

Substitute products or services can Substitute products or services can turn an industry on its headturn an industry on its head

Industry is more attractive to new Industry is more attractive to new entrants when:entrants when:

Quality substitutes are not readily Quality substitutes are not readily availableavailable

Prices of substitute products are not Prices of substitute products are not significantly lower than those of the significantly lower than those of the industry’s productsindustry’s products

Buyers’ switching costs are highBuyers’ switching costs are high

Five Forces MatrixFive Forces Matrix

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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10

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30

40

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90

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

EastWestNorth

6-19Chapter 6: Business Plan


Business PrototypingBusiness Prototyping

Entrepreneurs test their Entrepreneurs test their business models on a small business models on a small scale before committing serious scale before committing serious resources to launch a business resources to launch a business that might not work that might not work

Example: eBayExample: eBay Recognizes that a business idea Recognizes that a business idea

is a hypothesis that needs to be is a hypothesis that needs to be tested before taking it full scale tested before taking it full scale


Product or ServiceFeasibility






Product or Service Product or Service Feasibility AnalysisFeasibility Analysis

Determines the degree to which a Determines the degree to which a product or service idea appeals to product or service idea appeals to potential customers and identifies potential customers and identifies the resources necessary to produce the resources necessary to produce it it

Two questions:Two questions: Are customers willing to purchase our Are customers willing to purchase our

good or service?good or service? Can we provide the product or service Can we provide the product or service

to customers at a profit? to customers at a profit?


Primary research – collect data firsthand Primary research – collect data firsthand and analyze itand analyze it Customer surveys and questionnairesCustomer surveys and questionnaires Focus groupsFocus groups

Secondary research – gather data that Secondary research – gather data that already has been compiled and analyze already has been compiled and analyze it it

PrototypesPrototypes In-home trialsIn-home trials

Product or Service Product or Service Feasibility AnalysisFeasibility Analysis



FinancialFeasibility




Financial Feasibility Financial Feasibility AnalysisAnalysis Capital requirementsCapital requirements – must have an – must have an

estimate of how much start-up estimate of how much start-up capital is required to launch the capital is required to launch the businessbusiness

Estimated earningsEstimated earnings – forecasted – forecasted income statementsincome statements

Return on investmentReturn on investment – combining – combining the previous two estimates to the previous two estimates to determine how much investors can determine how much investors can expect their investments to return expect their investments to return


A Business Plan Is…A Business Plan Is…

a systematic evaluation of a venture’s a systematic evaluation of a venture’s chances for successchances for success

a way to determine the risks facing a a way to determine the risks facing a ventureventure

a game plan for managing a business a game plan for managing a business successfullysuccessfully

a tool for comparing actual and target a tool for comparing actual and target resultsresults

an important tool for attracting capitalan important tool for attracting capital


A Business Plan:A Business Plan:Two Essential Two Essential FunctionsFunctions

1.1. Guiding the company Guiding the company by charting its future by charting its future course and defining its course and defining its strategy for following itstrategy for following it

2.2. Attracting lenders and Attracting lenders and investors who will investors who will provide needed capitalprovide needed capital


Three Tests Every Three Tests Every Business Plan Must Business Plan Must PassPass

Reality Test Reality Test

Competitive Competitive

TestTest

Value TestValue Test


A Business PlanA Business Plan

A plan is a reflection of its creatorA plan is a reflection of its creator Sometimes the primary benefit of Sometimes the primary benefit of

preparing a plan is the realization preparing a plan is the realization that a business idea just won’t that a business idea just won’t work! work!

The real value in preparing a plan The real value in preparing a plan is not as much in the plan itself as is not as much in the plan itself as it is in the it is in the processprocess of creating it of creating it


Why Take the Time Why Take the Time to Build a Business to Build a Business Plan?Plan?

Although building a plan does Although building a plan does not guarantee success, it not guarantee success, it doesdoes increase your chances of increase your chances of succeeding in businesssucceeding in business

A plan is like a road map that A plan is like a road map that serves as a guide on a journey serves as a guide on a journey through unfamiliar, harsh, and through unfamiliar, harsh, and dangerous territory. Don’t dangerous territory. Don’t attempt the trip without a attempt the trip without a map!map!


Writing a Business Writing a Business PlanPlan

Typical plan is 20 to 40 Typical plan is 20 to 40 pages long pages long

Like every business Like every business venture, every business venture, every business plan is uniqueplan is unique

Use it to tell your Use it to tell your company’s story company’s story


Key Elements of a Key Elements of a Business PlanBusiness Plan

Title page and table of Title page and table of contentscontents

Executive summary Executive summary Mission statementMission statement Company historyCompany history Business and industry profileBusiness and industry profile Business strategyBusiness strategy Description of Description of

products/servicesproducts/services


Features vs. BenefitsFeatures vs. Benefits

FeatureFeature – a descriptive fact about a – a descriptive fact about a product or service (“an product or service (“an ergonomically designed, more ergonomically designed, more comfortable handle”)comfortable handle”)

BenefitBenefit – what a customer gains – what a customer gains from the product or service feature from the product or service feature (“fewer problems with carpal tunnel (“fewer problems with carpal tunnel syndrome and increased syndrome and increased productivity”) productivity”)


Key Elements of a Key Elements of a Business PlanBusiness Plan Marketing strategyMarketing strategy

(Continued)(Continued)


Marketing StrategyMarketing Strategy

Prove that a market existsProve that a market exists Show customer interestShow customer interest Document market claims with Document market claims with researchresearch

Describe target customers Describe target customers Advertising and promotion Advertising and promotion Market size and trendsMarket size and trends Location analysisLocation analysis PricingPricing DistributionDistribution




Competitor analysisCompetitor analysis Owners’ and managers’ Owners’ and managers’

résumrésumés és Plan of operationPlan of operation Financial forecastsFinancial forecasts


Financial ForecastsFinancial Forecasts

Projected financial statementsProjected financial statements Monthly for one yearMonthly for one year Quarterly for next twoQuarterly for next two

Income statementIncome statement Balance sheetBalance sheet Cash FlowCash Flow Capital expendituresCapital expenditures


Financial ForecastsFinancial Forecasts

Three forecastsThree forecasts PessimisticPessimistic Most LikelyMost Likely OptimisticOptimistic

Realistic!Realistic! Include assumptions on which Include assumptions on which

forecasts are basedforecasts are based





Competitor analysisCompetitor analysis Owners’ and managers’ Owners’ and managers’

résumrésumés és Plan of operationPlan of operation Financial forecastsFinancial forecasts Loan/investment Loan/investment

proposalproposal


Tips on PreparingTips on Preparinga Business Plana Business Plan Make sure your plan has an attractive Make sure your plan has an attractive

cover (first impressions are crucial)cover (first impressions are crucial) Rid your plan of all spelling and Rid your plan of all spelling and

grammatical errors grammatical errors Make your plan visually appealing Make your plan visually appealing Include a table of contents to allow Include a table of contents to allow

readers to navigate your plan easily readers to navigate your plan easily


Make it interesting!Make it interesting! Use spreadsheets to generate financial Use spreadsheets to generate financial

forecastsforecasts AlwaysAlways include cash flow projections include cash flow projections Keep your plan “crisp” – between 25 and Keep your plan “crisp” – between 25 and

50 pages long50 pages long Tell the truth – Tell the truth – alwaysalways


Tips on PreparingTips on Preparinga Business Plana Business Plan


The "5 Cs" of The "5 Cs" of CreditCredit

CapitalCapital

CapacityCapacity CollateralCollateral CharacterCharacter

ConditionsConditions


Presenting the PlanPresenting the Plan

Prepare!Prepare! Demonstrate enthusiasm, but don’t be Demonstrate enthusiasm, but don’t be

overemotionaloveremotional Start by communicating the dynamic Start by communicating the dynamic

opportunity your business idea offers opportunity your business idea offers ““Hook” investors quickly with an up-Hook” investors quickly with an up-

front explanation of the venture, its front explanation of the venture, its opportunities, and its benefits to themopportunities, and its benefits to them


Use visual aidsUse visual aids Hit the highlights; focus on the Hit the highlights; focus on the

details laterdetails later Keep your presentation “crisp” – Keep your presentation “crisp” –

2 or 3 major points 2 or 3 major points Avoid overloading your audience Avoid overloading your audience

with technical jargonwith technical jargon

(Continued)(Continued)Presenting the PlanPresenting the Plan



Answer every lender or investor’s Answer every lender or investor’s question: “What’s in it for me?”question: “What’s in it for me?”

Close by reinforcing the nature of Close by reinforcing the nature of the opportunity the opportunity

Be prepared (with details) for Be prepared (with details) for questions investors are likely to questions investors are likely to askask




Learn to read the pattern of Learn to read the pattern of investors’ questions and address investors’ questions and address the issues that concern them the issues that concern them

Follow up with every investor to Follow up with every investor to whom you make your whom you make your presentationpresentation



All rights reserved. No part of this publication may All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, electronic, mechanical, photocopying, recording, or otherwise, without the prior written or otherwise, without the prior written permission of the publisher. Printed in the United permission of the publisher. Printed in the United States of America.States of America.

Copyright ©2012 Pearson Education, Copyright ©2012 Pearson Education, Inc. Publishing as Prentice HallInc. Publishing as Prentice Hall

chapter 6: business plan copyright ©2012 pearson education, inc. publishing as prentice hall 6-1...

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