Chapter 6 - Writing a Business Plan

The Business Plan
It is a mistake to write a business plan too early. The business plan must be substantive enough and have sufficient details about the merits of the new venture in order to convince the reader that the new business is exciting and should receive support.

Reasons for Writing a Business Plan
There are two primary reasons to write a business plan. Internal reason and external reason.

1. Internal Reason
Forces the founding team to systemically think through every aspect of its new venture. We need to do as much research as possible before developing the products. So that our business won't suffer in the midway.

2. External Reason

Communicates the merits of a new venture to outsiders, such as investors and bankers. So then your business can grow with the help of investors if you catch their interest in your business.

Who Reads the Business Plan and What Are They Looking for?
There are two primary audiences for a firm’s business plan. A Firm's Employees and Investors or other external stakeholders.

A. A Firm’s Employees
It is important for both the management team and the rank-and-file employees. A clearly written business plan also helps a firm’s rank-and-file employees operate in sync and move forward in a consistent and purposeful manner.

B. Investors and Other External Stakeholders
Investors, potential business partners, and key employees are the second audience for a business plan. To appeal to this group, the business plan must be realistic and not reflective of overconfidence on the firm’s part. Overly optimistic statements or projections undermine a business plan’s credibility. The plan must clearly demonstrate that the business idea is viable and offers potential investors financial returns greater than lower-risk investment alternatives.

Guidelines for Writing a Business Plan
If the plan is incomplete or looks sloppy, it is easy for an investor to infer that the venture itself is incomplete and sloppy. It is important to be sensitive to the structure, content, and style of a business plan before sending it to an investor or anyone else who may be involved with the new firm.

A. Structure of the Business Plan
Here are the red flags that must be avoided in every Business Plan

B. Content of the Business Plan
It must be long enough to provide sufficient information, yet short enough to maintain reader interest. For most plans, 25 to 35 pages (and typically closer to 25 than 35 pages) are sufficient.

1. Style or Format of the Business Plan
The plan’s appearance must be carefully thought out. It should look sharp but not give the impression that a lot of money was spent to produce it. There are three types of business plans, each of which has a different rule of thumb regarding length and level of detail.

• Summary plan: 10-15 pages. Works best for new ventures in the early stages of development that want to "test the waters" to see if investors are interested in their idea
• Full business plan: 25-35 pages. Works best for new ventures that are at the point where they need funding or financing; serves as a"blueprint" for the company's operations.
• Operational business plan: 40-100 pages. It is meant primarily for an internal audience; it works best as a tool for creating a blueprint for a new venture's operations and providing guidance to operational managers.

2. Recognizing the Elements of the Plan May Change
Recognize that the plan will usually change as it is being written and as the business evolves. New insights invariably emerge when entrepreneurs immerse themselves in writing the plan and start getting feedback from others. This process continues throughout the life of a company, and it behooves entrepreneurs to remain alert and open to new insights and ideas.

Outline of the Business Plan

Exploring Each Section of the Plan

Business Plan Outline

Cover Page

Table of Contents

I. Executive Summary

II. Industry Analysis

Industry Size, Growth Rate, and Sales Projections

Industry Structure

Nature of Participants

Key Success Factors

Industry Trends

Long-Term Prospects

III. Company Description

Company History

Mission Statement

Products and Services

Current Status

Legal Status and Ownership

Key Partnerships (if any)

IV. Market Analysis

Market Segmentation and Target Market Selection

Buyer Behavior

Competitor Analysis

Estimates of Annual Sales and Market Share

V. The Economics of the Business

Revenue Drivers and Profit Margins

Fixed and Variable Costs

Operating Leverage and Its Implications

Start-up Costs

Break-Even Chart and Calculation

VI. Marketing Plan

Overall Marketing Strategy

Product, Price, Promotions, and Distribution

Sales Process (or Cycle)

Sales Tactics

VII. Design and Development Plan

Development Status and Tasks

Challenges and Risks

Projected Development Costs

Proprietary Issues (Patents, Trademarks, Copyrights, Licenses, Brand Names)

VIII. Operations Plan

General Approach to Operations

Business Location

Facilities and Equipment

IX. Management Team and Company Structure

Management Team (Including a Skills Profile)

Board of Directors

Board of Advisors

Company Structure

X. Overall Schedule

XI. Financial Projections

Sources and Uses of Funds Statement

Assumptions Sheet

Pro Forma Income Statements

Pro Forma Balance Sheets

Pro Forma Cash Flows

Ratio Analysis

Appendices

1. Cover Page and Table of Contents
The cover page should include the company’s name, address, and phone number; the date; the contact information for the lead entrepreneur; and the company’s website address if it has one.

• At the top of the page, you should include the contact information (a land-based phone number, e-mail address, and a smartphone number).
• At the bottom of the cover page should include information alerting the reader to the confidential nature of the plan.
• If the company already has a distinctive trademark, it should be placed somewhere near the center of the page.
• A table of contents should follow the cover letter. It should list the sections and page numbers of the business plan and the appendices.

2. Executive Summary
The executive summary is a short overview of the entire business plan; it provides a busy reader with everything she needs to know about the new venture’s distinctive nature.

3. Industry Analysis
The main body of the business plan begins by describing the industry in which the firm intends to compete. This description should include data and information about various characteristics of the industry, such as its size, growth rate, and sales projections.

4. Company Description

• The company history section explains where the idea for the company came from and the driving force behind its inception.
• A mission statement defines why a company exists and what it aspires to become.
• A tagline is a phrase that a business plans to use to reinforce its position in the marketplace.
• The products and services section should include a description of how your product or service is unique and how you plan to position it in the marketplace.
• The current status section should reveal how far along your company is in its development.
• A final item a business should cover in this opening section is whether it has any key partnerships that are integral to the business.

5. Market Analysis
The market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) to which the firm will try to appeal. The final section of the market analysis estimates a firm’s annual sales and market share.

6. The Economics of the Business
It addresses the basic logic of how profits are earned in the business and how many units of a business’s product or service must be sold for the business to “break even” and then start earning a profit.

7. Marketing Plan
The marketing plan focuses on how the business will market and sell its product or service. It deals with the nuts and bolts of marketing in terms of price, promotion, distribution, and sales.

8. Product (or Service) Design and Development Plan
If you’re developing a completely new product or service, you need to include a section in your business plan that focuses on the status of your development efforts. The first issue to address is to describe the present stage of the development of your product or service. Most products follow a logical path of development that includes product conception, prototyping, initial production, and full production. A section labeled “Challenges and Risks” should be included and disclose any major anticipated design and development challenges and risks that will be involved in bringing the product or service to market. A final section should describe any patents, trademarks, copyrights, or trade secrets that you have secured or plan to secure relative to the products or services you are developing.

9. Operations Plan

10. Management Team and Company Structure
The management team of a new firm typically consists of the founder or founders and a handful of key management personnel.
The final portion of this section of your business plan focuses on how your company will be structured. The most effective way to illustrate how a company will be structured and the lines of authority and accountability that will be in place is to include an organizational chart in the plan. An organizational chart is a graphic representation of how authority and responsibility are distributed within the company.

11. Overall Schedule
A schedule should be prepared that shows the major events required to launch the business. The schedule should be in the format of milestones critical to the business’s success, such as incorporating the venture, completion of prototypes, rental of facilities, obtaining critical financing, starting the production of operations, obtaining the first sale, and so forth.

12. Financial Projections
The final section of a business plan presents a firm’s pro forma (or projected) financial projections.

• The first thing to include is a sources and uses of funds statement, which is a document that lays out specifically how much money a firm needs, where the money will come from, and how the money will be used.
• The next item to include is an assumption sheet, which is an explanation of the most critical assumptions on which the financial statements are based.
• The pro forma (or projected) financial statements are the heart of the financial section of a business plan. Pro forma financial statements include the pro forma income statement, the pro forma balance sheet, and the pro forma cash flow statement.

13. Appendix
Any material that does not easily fit into the body of a business plan should appear in an appendix. It should include only the additional information vital to the plan but not appropriate for the body of the plan itself.

14. Putting It All Together
In evaluating and reviewing the completed business plan, the writers should put themselves in the reader’s shoes to determine if the most important questions about the viability of their business venture have been answered.

Presenting the Business Plan to Investors
If the business plan successfully elicits the interest of a potential investor, the next step is to meet with the investor and present the plan in person.

A. The Oral Presentation of a Business Plan
The founders of a new venture should prepare a set of PowerPoint slides that will fill the time slot allowed for the presentation portion of the meeting. The first picture shown below is the 10 most important questions a business plan should answer. The second picture is twelve PowerPoint slides to include in an investor presentation.

B. Questions and Feedback to Expect from Investors
The question-and-answer period is extremely important. Here investors are typically looking for how well entrepreneurs think on their feet and how knowledgeable they are about the business venture. An entrepreneur can take the investor’s feedback to heart and use it to improve the business plan and/or the presentation.

Chapter 5 - Industry and Competitor Analysis

Industry Analysis
There are three major questions that have to be answered. First, is it a realistic place for a new venture to enter? Second, does the industry contain markets that are ripe for innovation or are underserved? Third, are there positions in the industry that will avoid some of the negative attributes of the industry as a whole?

Studying Industry Trends
Environmental and business trends are the two most important trends for entrepreneurs to evaluate.

1. Environmental Trends
Economic trends, social trends, technological advances, and political and regulatory changes are the most important environmental trends for entrepreneurs to study.

2. Business Trends
In a similar fashion, the firms in some industries are able to move customer procurement and service functions online, at considerable cost savings, while the firms in other industries aren’t able to capture this advantage. Trends such as these favor some industries over others.

The Five Forces Model
Professor Michael Porter developed this important tool. Each of Porter’s five forces affects the average rate of return for the firms in an industry by applying pressure on industry profitability.

Porter points out that industry profitability is not a function of only a product’s features. Porter’s essential points still offer important insights for entrepreneurs such as the insight suggested by the following quote:

"Industry profitability is not a function of what the product looks like or whether it embodies high or low technology but of industry structure. Some very mundane industries such as postage meters and grain trading are extremely profitable, while some more glamorous, high-technology industries such as personal computers and cable television are not profitable for many participants."

A. Threat of Substitutes
Industries are more attractive when the threat of substitutes is low.
This means that products or services from other industries can’t easily serve as substitutes for the products or services being made and sold in the focal firm’s industry.
Products or services from other industries can’t easily serve as substitutes for the products or services being made and sold in the focal firm’s industry.

B. Threat of New Entrants
Industries are more attractive when the threat of entry is low. This means that competitors cannot easily enter the industry and successfully copy what the industry incumbents are doing to generate profits.
There are a number of ways that firms in an industry can keep the number of new entrants low. These techniques are referred to as barriers to entry. A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry. Let’s look at the six major sources of barriers to entry:

1. Economies of scale
Economies of scale occur when mass-producing a product results in lower average costs.

2. Product differentiation
Product innovation is another way a firm can differentiate its good or service from competitors’ offerings.

3. Capital requirements
The need to invest large amounts of money to gain entrance to an industry is another barrier to entry.

4. Cost advantages independent of size
Entrenched competitors may have cost advantages not related to size that are not available to new entrants.

5. Access to distribution channels
Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market.

6. Government and legal barriers
In knowledge-intensive industries, patents, trademarks, and copyrights form major barriers to entry.

When start-ups create their own industries or create new niche markets within existing industries, they must create barriers to entry of their own to reduce the threat of new entrants.

C. Rivalry Among Existing Firm
In most industries, the major determinant of industry profitability is the level of competition among the firms already competing in the industry. Some industries are fiercely competitive to the point where prices are pushed below the level of costs.

1. Number and balance of competitors
With a larger number of competitors, it is more likely that one or more will try to gain customers by cutting prices.

2. Degree of difference between products
The degree to which products differ from one producer to another affects industry rivalry. 

3. The growth rate of an industry
The competition among firms in a slow-growth industry is stronger than among those in fast-growth industries. Slow-growth industry firms must fight for market share, which may tempt them to lower prices or increase quality to obtain customers. In fast-growth industries there are enough customers to satisfy most firms’ production capacity, making price-cutting less likely.

4. Level of fixed costs
Firms that have high fixed costs must sell a higher volume of their product to reach the break-even point than firms with low fixed costs.

D. Bargaining Power of Suppliers
In general, industries are more attractive when the bargaining power of suppliers is low.
In some cases, suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing the quality of the components they provide. If a supplier reduces the quality of the components it supplies, the quality of the finished product will suffer, and the manufacturer will eventually have to lower its price.

1. Supplier concentration
When there are only a few suppliers to provide a critical product to a large number of buyers, the supplier has an advantage.

2. Switching costs
Switching costs are the fixed costs that buyers encounter when switching or changing from one supplier to another. If switching costs are high, a buyer will be less likely to switch suppliers.

3. Attractiveness of substitutes
Supplier power is enhanced if there are no attractive substitutes for the products or services the supplier offers.

4. The threat of forwarding integration
The power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyer’s industry.

E. Bargaining Power of Buyers
In general, industries are more attractive when the bargaining power of buyers (a start-up’s customers) is low. Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality.

1. Buyer group concentration
Meaning that there are only a few large buyers, and they buy from a large number of suppliers, they can pressure the suppliers to lower costs and thus affect the profitability of the industries from which they buy.

2. Buyer’s costs
The greater the importance of an item is to a buyer, the more sensitive the buyer will be to the price it pays.

3. Degree of standardization of supplier’s products
The degree to which a supplier’s product differs from its competitors’ offering affects the buyer’s bargaining power.

4. The threat of backward integration
The power of a buyer is enhanced if there is a credible threat that the buyer might enter the supplier’s industry.

The Value of the Five Forces Model
The five forces model can be used in two ways:

First, to help a firm determine whether it should enter a particular industry.
Second, whether it can carve out an attractive position in that industry.

Industry Types and the Opportunities They Offer
It is helpful for a new venture to study industry types to determine the opportunities they offer.

A. Emerging Industries
Recent changes in demand or technology; the new industry standard operating procedures have yet to be developed.

B. Fragmented Industries
A large number of firms of approximately equal size.

C. Mature Industries
Slow increases in demand, numerous repeat customers, and limited product innovation

D. Declining Industries
Consistent reduction in industry demand

E. Global Industries
Significant international sales

Competitor Analysis
Competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to obtain a competitive advantage in one or more areas.

A. Identifying Competitors
The first step in the competitive analysis is to determine who the competition is.

1. Direct competitors
Businesses that offer products or services that are identical or highly similar

2. Indirect competitors
These competitors offer close substitutes to the product

3. Future competitors
These are companies that are not yet direct or indirect competitors but could move into one of these roles at any time.

B. Sources of Competitive Intelligence
A firm must first understand the strategies and behaviors of its competitors. The information that is gathered by a firm to learn about its competitors is called competitive intelligence (The information that is gathered by a firm to learn about its competitors).
The sources of competitive intelligence are:

• Attend conferences and trade shows
• Purchase competitors’ products
• Study competitors’ websites and social media pages
• Set up Google e-mail alerts
• Read industry-related books, magazines, websites, and blogs
• Talk to customers about what motivated them to buy your product as opposed to your competitor’s product