Entrepreneurship and Effective Small Business Management 11/e by Scarborough and Cornwall 8-1

Chapter 8 New Business Planning Process: Feasibility Analysis, Business Modeling, and Crafting a Winning Business Plan

New Business Planning The easiest part of launching a new business is coming up with the idea But, the great idea is just the start Planning for a new business requires: Feasibility analysis: should we proceed with this idea? Business model: how should we proceed with this idea? Business plan: transforming the idea into a successful business

New Business Planning New Business Planning Process

Conducting a Feasibility Analysis A feasibility analysis consists of four interrelated components: An industry and market feasibility analysis A product or service feasibility analysis A financial feasibility analysis An entrepreneur feasibility analysis

Conducting a Feasibility Analysis Elements of a Feasibility Analysis

Conducting a Feasibility Analysis Industry and Market Feasibility Analysis Two areas of focus: Determining how attractive an industry is overall as a “home” for a new business Identifying possible niches a small business can occupy profitably ● How large is the industry? ● How fast is it growing? ● Is the industry as a whole profitable? ● Is the industry characterized by high profit margins or razor-thin margins? ● How essential are its products or services to customers? ● What trends are shaping the industry’s future? ● What threats does the industry face? ● What opportunities does the industry face? ● How crowded is the industry? ● How intense is the level of competition in the industry? ● Is the industry young, mature, or somewhere in between?

Conducting a Feasibility Analysis Begin with a broad look at the industry Use Porter’s five forces model Five forces interact with one another to determine the setting in which companies compete and, hence, the attractiveness of the industry: Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of new entrants Threat of substitute products or services

Conducting a Feasibility Analysis Porter’s Five Forces Model

Conducting a Feasibility Analysis Rivalry among companies competing in the industry Strongest of the five forces Industry is more attractive when: Number of competitors is large, or, at the other extreme, quite small Competitors are not similar in size or capacity Industry is growing fast Opportunity to sell a differentiated product or service exists

Conducting a Feasibility Analysis Bargaining power of suppliers to the industry The greater the leverage of suppliers, the less attractive the industry Industry is more attractive when: Many suppliers sell a commodity product Substitutes are available Switching costs are low Items account for a small portion of the cost of finished products

Conducting a Feasibility Analysis Bargaining power of buyers Highest when the number of customers is small and cost of switching to a competitor’s product is low Industry is more attractive when: Customers’ switching costs are high Number of buyers is large Customers want differentiated products Customers find it difficult to collect information for comparing suppliers Items account for a small portion of customers’ finished products

Conducting a Feasibility Analysis Threat of new entrants to the industry The larger the pool of potential new entrants, the less attractive the industry Industry is more attractive to new entrants when: Advantages of economies of scale are absent Capital requirements to enter are low Cost advantages are not related to company size Buyers are not loyal to existing brands Government does not restrict the entrance of new companies

Conducting a Feasibility Analysis Threat of substitute products or services Substitute products or services can turn an industry on its head Industry is more attractive to new entrants when: Quality substitutes are not readily available Prices of substitute products are not significantly lower than those of the industry’s products Buyers’ switching costs are high

Conducting a Feasibility Analysis Five Forces Matrix

Conducting a Feasibility Analysis A niche strategy can be a good way to enter a market, but carries some risks: Can require adaptability of initial plans Niches change Niches can go away Niches can grow

Conducting a Feasibility Analysis A feasibility analysis consists of four interrelated components: An industry and market feasibility analysis A product or service feasibility analysis

Conducting a Feasibility Analysis Product or Service Feasibility Analysis: Is There a Market? Determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce it Two questions: Are customers willing to purchase our good or service? Can we provide the product or service to customers at a profit?

Conducting a Feasibility Analysis Primary research: collect data firsthand and analyze it Customer surveys and questionnaires Focus groups Prototypes In-home trials “Windshield” research

Conducting a Feasibility Analysis Secondary research: gather data that already has been compiled and analyze it Trade associations and business directories Industry databases Demographic data Forecasts Market research Articles Local data The Internet

Conducting a Feasibility Analysis A feasibility analysis consists of four interrelated components: An industry and market feasibility analysis A product or service feasibility analysis A financial feasibility analysis

Conducting a Feasibility Analysis Financial Feasibility Analysis: Is There Enough Margin? Capital requirements Must have an estimate of how much start-up capital is required to launch the business Bootstrapping Estimated earnings Forecasted income statements Time out of cash Surviving at current rate of negative cash flow Return on investment: How much investors can expect their investments to return

Conducting a Feasibility Analysis A feasibility analysis consists of four interrelated components: An industry and market feasibility analysis A product or service feasibility analysis A financial feasibility analysis An entrepreneur feasibility analysis

Conducting a Feasibility Analysis Entrepreneur Feasibility: Is This Idea Right for Me? Entrepreneurial readiness: knowledge, experiences, and skills necessary to have any chance of being successful

Developing and Testing a Business Model Most entrepreneurs use a visual process such as whiteboarding when developing their business models Develop a business model canvas comprised of nine segments

Developing and Testing a Business Model Business Model Canvas

Developing and Testing a Business Model Value Proposition Products and/or services offered to meet the needs of the customers Customer Segments Narrowing the target market focuses resources on serving a specific group of customers Customer Relationships How do customers want to interact with the business?

Developing and Testing a Business Model Channels Channels refer to both communication channels and distribution channels Define how the customers seek out information about this type of product Key Activities Build a basic checklist of what needs to be done Key resources Human, capital, and intellectual resources needed

Developing and Testing a Business Model Key partners Suppliers, outsourcing partners, and so on Revenue streams How will the value proposition generate revenue? Cost structure What are the fixed and variable costs necessary?

Developing and Testing a Business Model Developing a business model is a four phase process: Create an initial business model canvas Test the problem that the entrepreneur thinks the business solves for the customer Test the business model in the market Business prototyping Lean start-up Minimum viable product Make changes and adjustments in the business pivots

The Benefits of Creating a Business Plan Business plan: 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 Serves two functions: Guides the company’s growth and development Attracts lenders and investors

Three Tests That Every Business Plan Must Pass To get external financing, an entrepreneur needs to pass three tests: Reality test Competitive test Value test

The Elements of a Business Plan Common elements of a business plan Title page and table of contents Executive summary Mission statement Company history Business and industry profile Business strategy Description of products/services Goals and objectives

The Elements of a Business Plan Business strategy Competitor analysis Marketing strategy Showing customer interest Documenting market claims Target market Advertising and promotion Market size and trends Location Pricing Distribution

The Elements of a Business Plan Description of the management team Plan of operation Pro forma (projected) financial statements Forecasts should be realistic Include a statement of assumptions The loan or investment proposal Funding sources Repayment schedule Implementation timetable

The Elements of a Business Plan Visualizing a Venture’s Risks and Rewards

The Elements of a Business Plan Visualizing a Venture’s Risks and Rewards A working business plan is used to guide the entrepreneur A presentation business plan is used to attract capital

The Elements of a Business Plan An entrepreneur should: Make sure the plan has an attractive cover Rid your plan of all spelling and grammatical errors Make the plan visually appealing Include a table of contents to allow readers to navigate the plan easily Make it interesting! Use spreadsheets to generate financial forecasts Always include cash flow projections Keep your plan “crisp” – long enough, but not too long Tell the truth – always

What Lenders and Investors Look for in a Business Plan The five Cs of credit: Capital Capacity Collateral Character Conditions

The Pitch: Making the Business Plan Presentation A business plan presentation should cover five basic areas: Your company and its product or services The problem to be solved – use a compelling story A description of your solution to the problem Your company’s business model Your company’s competitive edge

The Pitch: Making the Business Plan Presentation A business plan presentation should cover five basic areas: Your company and its product or services The problem to be solved – use a compelling story A description of your solution to the problem Your company’s business model Your company’s competitive edge

The Pitch: Making the Business Plan Presentation When making the presentation: Prepare Practice your delivery and then practice some more Demonstrate enthusiasm about the business but don’t be overemotional Focus on communicating the dynamic opportunity your idea offers and how you plan to capitalize on it Hook investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them

The Pitch: Making the Business Plan Presentation Use visual aids Follow Guy Kawasaki’s 10/20/30 rule for PowerPoint presentations Explain how your company’s products or services solve some problem and emphasize the factors that make your company unique Offer proof Hit the highlights Keep the presentation “crisp” just like your business plan

The Pitch: Making the Business Plan Presentation Avoid the use of technical terms Remember to answer the question “What’s in it for me?” Close by reinforcing the potential of the opportunity Be prepared for questions Anticipate the questions the audience is most likely to ask and prepare for them in advance Be sensitive to the issues that are most important to lenders and investors by reading the pattern of their questions Follow up with each potential investor