Chapter 5: Crafting a Business Plan and Building a Solid Strategic Plan
Chapter 5: Crafting a Business Plan and Building a Solid Strategic Plan MGMT 3850
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This 11 page Class Notes was uploaded by Alora Lornklang on Saturday February 20, 2016. The Class Notes belongs to MGMT 3850 at University of North Texas taught by Brandi Everett in Spring 2016. Since its upload, it has received 206 views. For similar materials see Foundations of Entrepreneurship in Entrepreneurship at University of North Texas.
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MGMT 3850 Foundations of Entrepreneurship Chapter 5: Crafting a Business Plan and Building a Solid Strategic Plan A business plan is a planning tool that builds on the foundation of the idea assessment, feasibility analysis, and business model. A business plan offers: o A systematic, realistic evaluation of a venture’s chances for success in the market o A way to determine the principal risks facing the venture. o A “game plan” for managing the business successfully during its startup o A tool for comparing actual results against targeted performance o An important tool for attracting capital in the challenging hunt for money LO-1: Explain the benefits of an effective business plan. Business plan: o A written summary of an entrepreneur’s proposed business venture, its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities. A business plan serves 2 functions: o Provides a battery of tools—a mission statement, goals objectives, budgets, financial forecasts, target markets, and entry strategies—to help entrepreneurs subject their ideas to one last test of reality before launching. o Attract lenders and investors To get external financing, an entrepreneur’s plan must past 3 tests with potential lenders and investors: o The reality test o Competitive test o Value test Reality test o External component involves proving that a market for the product or service really does exist. o Internal component focuses on the product or service itself. Competitive Test o External part evaluates the company’s relative position to its key competitors o Internal component focuses on management’s ability to to create accompany that will gain an edge over existing rivals. Value Test o To convince lenders and investors to put their money into the venture, a business plan must prove to them that it offers a high profitability of repayment or an attractive rate of return. LO-2: Describe the elements of a business plan. Title page and Table of contents o Contains a Title page with the company’s name, logo, and address as well as the names and contact information of the company founders. The Executive Summary o It should be concise—a maximum of one page—and should summarize all of the relevant points of the proposed deal. o A written version of the “elevator pitch” o The following fivepart framework helps entrepreneurs develop a meaningful elevator pitch Context: what does your company do in easytounderstand words? Benefit: What benefit does your company offer to customers? Target customers: Who does your company provide benefit to? Point of differentiation: How is your company different? Clincher: Can you leave your reader with a memorable, bottom line sound bite about your company? Mission and Vision Statement: o A mission statement expresses an entrepreneur’s vision for his or her company is and what it is to become. o Mission statements should be no more than 25 words and should clearly state the product or service the business sells, its target market, and the basic nature of the business. Description of the Firm’s Product or Service o An entrepreneur should describe the company’s overall product line, giving an overview of how customers will use its goods and services. o Feature: A descriptive fact about a product or service o Benefit: What a customer gains from the product or service Business and Industry Profile o A section that acquaints lenders and investors with the industry in which a company competes o Provides an overview of the industry or emerging developments within the industry, market size and its growth or decline, and the relative economic and competitive strength of the major firms in the industry Competitor analysis o Describes the new venture’s competition and the ways in which the chosen business strategy will position it effectively against key competitors o Should address these questions: Who are the company’s key competitors? What are their strengths and weaknesses? What are their strategies? What images do they have in the marketplace? How successful are they? What distinguishes the entrepreneur’s product or service from others already on the market, and how will these differences produce a competitive edge? Market Entry Strategy o By laying out a market entry strategy, an entrepreneur explains how he or she plans to enter the market and gain a competitive edge and how his or her value proposition sets the business apart form the competition. Marketing Strategy o Showing Customer Interest Prove that their target customers actually need or want their goods or services and are willing to pay for them o Documenting Market Claims Entrepreneurs must support claims of market size and growth with facts, and that requires market research. One of the main purposes of this section is to lay the foundation for financial forecasts. o Target Market Who are the company’s target customers? How many of them are in the company’s trading area? What are their characteristics? What, why, and when do they buy? o Advertising and promotion When developing an advertising and promotion strategy, an entrepreneur should keep in mind what he or she learned when defining the communication channel in the business modeling process. What media are most effective in reaching the target market? How will the promotional campaign position the company’s products or services? o Market Size and Trends How large is the potential market? Is it growing or shrinking? Is demand tied to another product or service? o Location Which sites put the company in the path of its target customers? Using demographic reports and market research to screen potential sites takes the guesswork out of choosing the “right” location for a business. o Pricing What does the product or service cost to product or deliver? Pricing helps communicate and reinforce key elements of the value proposition such as quality and value. o Distribution Describes the specific channels of distribution the business will use to distribute its products and services Ex: Internet, direct mail, sales agents, retailers Entrepreneurs’ and Managers’ Resumes o A resume should summarize each individual’s education, work history (emphasizing managerial responsibilities, and duties) and relevant business experience. o Lenders and investors look for experience, talent, and integrity of the people who will breathe life into the plan. Plan of Operation o An entrepreneur should construct an organization chart identifying the business’s key positions and the people who occupy them. o A description of the form of ownership and of any leases, contracts, and other relevant agreements pertaining to the operation is helpful. Pro Forma (Projected) Financial Statements o Projected financial statements for the operation for the next year using past operating data, published statistics, and research to derive forecasts of the income statement, balance sheet, cash forecast, and a schedule of planned capital expenditures. The Loan or Investment Proposal o Should state the purpose of the financing, the amount requested, and the plans for repayments or, in the case of investors, an attractive exit strategy. o To make sure that the impression if favorable, an entrepreneur should follow these tips: Realize that first impressions are crucial. Make sure the plan has an attractive cover. Make sure the plan is free of spelling and grammatical errors. Make it visually appealing (color charts, figures, diagrams) Include table of contents with page numbers Make it interesting Make the case that the business will make money Use computer spreadsheets to generate a set of realistic financial forecasts Always include cash flow projections Keep the plan “crisp,” (long enough to say what it should but not too long to read) Tell the truth. LO-3: Explain the “Five Cs of Credit” and why they are important to potential lenders and investors receiving business plans. Capital o A small business must have a stable capital base otherwise the lender would be making a capital investment in the business. o Investors want to make sure entrepreneurs have invested enough of their own money into the business to survive the tenuous start up period. Capacity o Synonym for cash flow o Lenders and investors must be convinced of a company’s ability to meet its regular financial obligations and to repay the bank loan, and that takes cash. Collateral o Collateral includes any assets an entrepreneur pledges to a lender as security for repayment of the loan. o Entrepreneurs must be ready to sign personal guarantees for all business loans, which state that they are personally liable for all bank loans to the business should the business fail. Character o An evaluation of character frequently is based on intangible factors such as honesty, competence, polish, determination, knowledge, experience, and ability. o Lenders and investors know that most small businesses fail because of poor management and they try to avoid extending loans to highrisk entrepreneurs. Conditions o Banks consider factors relating to the business operation such as potential growth in the market, competition, location, form of ownership, and loan purpose. LO-4: Understand the keys to making an effective business plan presentation A business plan presentation should cover 5 basic areas: o Your company and its product and services. The presentation should answer in simple terms the first question that every potential lender and investor has: What does your company do? o The problem to be solved Preferably told in a personal way through a compelling story. o A description of your company’s solution to the problem. Ideally, a unique way o Your company’s business model. How your company makes money and includes figures such as revenue per sale, expected gross profit and net profit margins, and other relevant statistics o Your company’s competitive edge Clearly identify the factors that set your company apart from competition Helpful tips for making a business plan presentation to potential lenders and investors include: o Prepare o Practice your delivery o Demonstrate enthusiasm o Focus on communicating the dynamic opportunity your idea offers and how you plan to capitalize on it o Use visual aids o Follow 10/20/30 rule o Explain how your company’s products or services solve some problem and emphasize the factors that make your company unique. o Integrate relevant facts into your presentation to prove your plan’s claims, customers’ satisfaction with your company’s product’ or services, and its profit potential. o Hit the highlights o Anticipate questions LO-5: Understand the importance of strategic management to a small business Intellectual capital o One source of a company’s competitive advantage that consists of human, structural, or customer capital Human capital o Consists of talents, creativity, skills, and abilities of a company’s workforce and shows up in the innovative strategies, plans, and processes the people in an organization develop and then passionately pursue. Structural capital o The accumulated knowledge and experience that a company possesses. It can take many forms, including processes, software, patents, copyrights, and the knowledge and experience of the people in the company Customer capital o The established customer base, positive reputation, ongoing relationships, and goodwill that a company builds over time with its customers. LO-6: Explain why and how a small business must create a competitive advantage in the market. Competitive advantage o The value proposition that sets a small business apart from its competitors and gives it a unique position in the market that is superior to its competition. Entrepreneurs should examine five aspects of their business to define their companies’ competitive advantages o Products they sell. o Service they provide o Pricing they offer o Way they sell o Values to which they are committed In the long run, a company gains a sustainable competitive advantage through its ability to develop a set of core competencies that enable it to service its selected target customers better than its rivals. Core competencies o A unique set of capabilities that a company develops in key areas that allow it to vault past competitors. The strategic management procedure for a small business should include: o Use a relatively short planning horizon—two years or less o Be informal and not overly structured; shirtsleeve approach o Encourage the participation of employees and outside parties to improve the reliability and creativity of the resulting plan o Do not begin with setting objectives because extensive objective setting early on may interfere with the creative process of strategic management o Maintain flexibility: competitive conditions change too rapidly for any plan to be considered permanent o Focus on strategic thinking, not just planning, by linking longrange goals to daytoday operations. o Be an ongoing process because businesses and the competitive environment in which they operate constantly change. LO-7: Develop a strategic plan for a business using the nine steps in the strategic management process. Step 1: Develop a Clear Vision and Translate It Into a Meaningful Mission Statement A strong vision helps a company in four ways: o Vision provides direction o Vision determines decisions o Vision inspires people o Vision allows for perseverance in the face of adversity. Vision is based on an entrepreneur’s values. Mission statement o An enduring declaration of a company’s purpose that addresses the first question of any business venture: What business are we in? Elements of a mission statement o What are we in business to accomplish? o Who are we in business to serve? o How are we going to accomplish that purpose? o What principles and beliefs form the foundation of the way we do business? Tips on writing a powerful mission statement Page 185 Step 2: Assess the Company’s Strengths and Weaknesses Strengths o Positive internal factors that a company can use to accomplish its mission, goals, and objectives Weaknesses o Negative internal factors that inhibit the accomplishment of a company’s mission, goals, and objectives. Step 3: Scan the Environment for Significant Opportunities and Threats Facing the Business Opportunities o Positive external options that a company can exploit to accomplish its mission, goals, and objectives. Threats o Negative external forces that inhibit a company’s ability to achieve its mission, goals, and objectives. Step 4: Identify the Key Factors for Success in the Business Key Success Factors (KSFs) o The factors that determine a company’s ability to compete successfully in an industry. Identifying the KSFs in an industry allows entrepreneurs to determine where they should focus their companies’ resources strategically. Step 5: Analyze the Competition Keeping tabs on rivals’ movements through competitive intelligence programs is a vital strategic strategy. The primary goals of a competitive intelligence program include the following: o Conducting continuous rather than periodic analysis of competition o Avoiding surprises from existing competitors’ new strategies and tactics o Identifying potential new competitors o Improving reaction time to competitors’ actions o Anticipating rivals’ next strategic moves Competitor Analysis o Direct competitors Offer the same products and services, and customers often compare prices, features, and deals from those competitors o Significant Competitors Offer some of the same products. Although their product or service lines may be somewhat different, there is competition in several key areas. o Indirect competitors Offer the same or similar products or services only in a small number of areas, and their target customers seldom overlap yours Collecting competitive intelligence enables entrepreneurs to update their knowledge of top competitors by answering the following questions: o What are the primary criteria customers used to choose among competitive businesses in your industry? o Who are your primary competitors? Where are they located? o What distinctive competencies have they developed? o How do their cost structures compare to yours? o Etc. (on page 193) Entrepreneurs can use the following lowcost competitive intelligence methods to collect info on their rivals: o Read industry trade publications for announcements and news stories o Ask questions of customers and suppliers o Monitor social media o Buy competitors products and compare o Etc. (Page 194) Competitive profile Matrix o A tool that allows business owners to evaluate their companies against major competitors using the key success factors for that market segment. Step 6: Create Company Goals and Objectives Goals o Broad, longrange attributes that a business seeks to accomplish; they tend to be general and sometimes abstract Objectives o More specific targets of performance, commonly addressing areas such as profitability, productivity, growth, and other key aspects of a business. Well written objectives have the following characteristics o They are specific o They are measurable o They are action commitments o They are assignable o They are realistic yet challenging o They are timely o They are written down Success Factors cites three primary benefits of an effective goalsetting process: o Increased profitability o Faster execution of company strategy o Reduced employee turnover Step 7: Formulate Strategic Options and Select the Appropriate Strategies Strategy o A road map of the actions an entrepreneur draws to fulfill the company’s mission, goals, and objectives. 3 Strategic Options: Cost leadership, differentiation, focus Cost leadership strategy o A strategy in which a company strives to be the lowcost producer relative to its competitors in the industry. Differentiation Strategy o A strategy in which a company seeks to build customer loyalty by positioning its goods or services in a unique or different fashion. Focus strategy o A strategy in which a company selects one or more market segments; identifies customers’ special needs, wants, and interests; and approaches them with a good or service designed to excel in meeting those needs, wants, and interests. o Three drivers that help focus on smaller niche market segments: The tools of production are more affordable The Internet has created better access to niche markets Search tools make it easier to reach specific customers Step 8: Translate Strategic Plans into Action Plans To make their strategic plans workable, entrepreneurs should divide them into projects, carefully defining each one by the following: o Purpose: What is the project designed to accomplish? o Scope: Which areas of the company will be involved? o Contribution: How does the project relate to other projects and to overall strategic plan? o Resource requirements: What human and financial resources are needed to complete the project successfully? o Timing: Which schedules and deadlines will ensure project completion? Step 9: Establish Accurate Controls Controlling The Strategy o The plans and objectives created in the strategic planning process become the standards against which actual performance is measured. o Balanced scorecards: A set of multidimensional measurements that are unique to a company and that incorporate both financial and operational measures to give managers a quick but comprehensive picture of a company’s performance. Customer Perspective o Customers judge companies by at least four standards: Time, quality, durability, and performance Internal Business Perspective o The internal factors on which mangers should focus are those that have the greatest impact on customer satisfaction and retention and on company effectiveness and efficiency. Innovation And Learning Perspective o If a company wants to continue its pattern of success, it cannot stand still; it must continuously innovate and improve. Financial Perspective o These measures focus on profitability, growth, and shareholder value. Corporate Citizenship o How well are we meeting our responsibility to society as a whole, the environment, the community, and other external stakeholders?
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