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

2. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-2 Feasibility Analysis Entrepreneurs do not lack creative ideas, but… Entrepreneurs do not lack creative ideas, but… Is a particular idea a viable foundation for creating a successful business? Is a particular idea a viable foundation for creating a successful business? Feasibility study addresses the question: “Should we proceed with this business idea?” Feasibility study addresses the question: “Should we proceed with this business idea?”

3. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-3 Feasibility Study Not the same as a business plan Not the same as a business plan Serves as a filter, screening out ideas that lack the potential for building a successful business before an entrepreneur commits the necessary resources to building a business plan Serves as a filter, screening out ideas that lack the potential for building a successful business before an entrepreneur commits the necessary resources to building a business plan An investigative tool An investigative tool

4. Industry and Market Feasibility Product or Service Feasibility FinancialFeasibility Elements of a Feasibility Analysis Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-4Chapter 6: Business Plan

5. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-5 Industry and Market Feasibility Product or Service Feasibility FinancialFeasibility Elements of a Feasibility Analysis

6. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-6 Industry and Market Feasibility Analysis Two areas of focus: 1. Determining how attractive an industry is overall as a “home” for a new business 2. Identifying possible niches a small business can occupy profitably

7. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-7 Five Forces Model Five forces interact with one another to determine the setting in which companies compete and, hence, the attractiveness of the industry: Five forces interact with one another to determine the setting in which companies compete and, hence, the attractiveness of the industry: 1. Rivalry among companies in the industry 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of new entrants 5. Threat of substitute products or services

8. Five Forces Model Industry Competitors Rivalry among existing firms Buyers Bargaining Power of Buyers Suppliers Bargaining Power of Suppliers Substitutes Potential Entrants Threat of New Entrants Threat of Substitute Products or Services Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-8Chapter 6: Business Plan

9. Five Forces Model Industry Competitors Rivalry among existing firms Buyers Bargaining Power of Buyers Suppliers Bargaining Power of Suppliers Substitutes Potential Entrants Threat of New Entrants Threat of Substitute Products or Services Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-9Chapter 6: Business Plan

10. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-10 Rivalry Among Companies Strongest of the five forces Strongest of the five forces Industry is more attractive when: 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

11. Five Forces Model Industry Competitors Rivalry among existing firms Buyers Bargaining Power of Buyers Suppliers Bargaining Power of Suppliers Substitutes Potential Entrants Threat of New Entrants Threat of Substitute Products or Services Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-11Chapter 6: Business Plan

12. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-12 Bargaining Power of Suppliers The greater the leverage of suppliers, the less attractive the industry The greater the leverage of suppliers, the less attractive the industry Industry is more attractive when: 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

13. Five Forces Model Industry Competitors Rivalry among existing firms Buyers Bargaining Power of Buyers Suppliers Bargaining Power of Suppliers Substitutes Potential Entrants Threat of New Entrants Threat of Substitute Products or Services Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-13 Chapter 6: Business Plan

14. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-14 Bargaining Power of Buyers Buyers’ influence is high when number of customers is small and cost of switching to a competitor’s product is low Buyers’ influence is high when number of customers is small and cost of switching to a competitor’s product is low Industry is more attractive when: 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

15. Five Forces Model Industry Competitors Rivalry among existing firms Buyers Bargaining Power of Buyers Suppliers Bargaining Power of Suppliers Substitutes Potential Entrants Threat of New Entrants Threat of Substitute Products or Services Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-15Chapter 6: Business Plan

16. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-16 Threat of New Entrants The larger the pool of potential new entrants, the less attractive an industry is The larger the pool of potential new entrants, the less attractive an industry is Industry is more attractive to new entrants when: 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

17. Five Forces Model Industry Competitors Rivalry among existing firms Buyers Bargaining Power of Buyers Suppliers Bargaining Power of Suppliers Substitutes Potential Entrants Threat of New Entrants Threat of Substitute Products or Services Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-17Chapter 6: Business Plan

18. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-18 Threat of Substitutes Substitute products or services can turn an industry on its head Substitute products or services can turn an industry on its head Industry is more attractive to new entrants when: 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

19. Five Forces Matrix Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-19Chapter 6: Business Plan

20. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-20 Business Prototyping Entrepreneurs test their business models on a small scale before committing serious resources to launch a business that might not work Entrepreneurs test their business models on a small scale before committing serious resources to launch a business that might not work  Example: eBay Recognizes that a business idea is a hypothesis that needs to be tested before taking it full scale Recognizes that a business idea is a hypothesis that needs to be tested before taking it full scale

21. Industry and Market Feasibility Product or Service Feasibility FinancialFeasibility Elements of a Feasibility Analysis Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall6-21Chapter 6: Business Plan

22. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-22 Product or Service Feasibility Analysis Determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce it Determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce it Two questions: Two questions:  Are customers willing to purchase our good or service?  Can we provide the product or service to customers at a profit?

23. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-23 Primary research – collect data firsthand and analyze it Primary research – collect data firsthand and analyze it  Customer surveys and questionnaires  Focus groups Secondary research – gather data that already has been compiled and analyze it Secondary research – gather data that already has been compiled and analyze it Prototypes Prototypes In-home trials In-home trials Product or Service Feasibility Analysis

24. Industry and Market Feasibility Product or Service Feasibility Financial Feasibility Elements of a Feasibility Analysis Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-24Chapter 6: Business Plan

25. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-25 Financial Feasibility Analysis Capital requirements – must have an estimate of how much start-up capital is required to launch the business Capital requirements – must have an estimate of how much start-up capital is required to launch the business Estimated earnings – forecasted income statements Estimated earnings – forecasted income statements Return on investment – combining the previous two estimates to determine how much investors can expect their investments to return Return on investment – combining the previous two estimates to determine how much investors can expect their investments to return

26. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-26 A Business Plan Is… a systematic evaluation of a venture’s chances for success a systematic evaluation of a venture’s chances for success a way to determine the risks facing a venture a way to determine the risks facing a venture a game plan for managing a business successfully a game plan for managing a business successfully a tool for comparing actual and target results a tool for comparing actual and target results an important tool for attracting capital an important tool for attracting capital

27. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-27 A Business Plan: Two Essential Functions 1. Guiding the company by charting its future course and defining its strategy for following it 2. Attracting lenders and investors who will provide needed capital

28. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-28 Three Tests Every Business Plan Must Pass Reality Test Reality Test Competitive Test Competitive Test Value Test Value Test

29. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-29 A Business Plan A plan is a reflection of its creator A plan is a reflection of its creator Sometimes the primary benefit of preparing a plan is the realization that a business idea just won’t work! Sometimes the primary benefit of preparing a plan is the realization that a business idea just won’t work! The real value in preparing a plan is not as much in the plan itself as it is in the process of creating it The real value in preparing a plan is not as much in the plan itself as it is in the process of creating it

30. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-30 Why Take the Time to Build a Business Plan? Although building a plan does not guarantee success, it does increase your chances of succeeding in business Although building a plan does not guarantee success, it does increase your chances of succeeding in business A plan is like a road map that serves as a guide on a journey through unfamiliar, harsh, and dangerous territory. Don’t attempt the trip without a map! A plan is like a road map that serves as a guide on a journey through unfamiliar, harsh, and dangerous territory. Don’t attempt the trip without a map!

31. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-31 Writing a Business Plan Typical plan is 20 to 40 pages long Typical plan is 20 to 40 pages long Like every business venture, every business plan is unique Like every business venture, every business plan is unique Use it to tell your company’s story Use it to tell your company’s story

32. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-32 Key Elements of a Business Plan Title page and table of contents Title page and table of contents Executive summary Executive summary Mission statement Mission statement Company history Company history Business and industry profile Business and industry profile Business strategy Business strategy Description of products/services Description of products/services

33. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-33 Features vs. Benefits Feature – a descriptive fact about a product or service (“an ergonomically designed, more comfortable handle”) Feature – a descriptive fact about a product or service (“an ergonomically designed, more comfortable handle”) Benefit – what a customer gains from the product or service feature (“fewer problems with carpal tunnel syndrome and increased productivity”) Benefit – what a customer gains from the product or service feature (“fewer problems with carpal tunnel syndrome and increased productivity”)

34. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-34 Key Elements of a Business Plan Marketing strategy Marketing strategy (Continued)

35. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-35 Marketing Strategy Prove that a market exists Prove that a market exists  Show customer interest  Document market claims with research Describe target customers Describe target customers Advertising and promotion Advertising and promotion Market size and trends Market size and trends Location analysis Location analysis Pricing Pricing Distribution Distribution

36. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-36 Key Elements of a Business Plan Marketing strategy Marketing strategy (Continued) Competitor analysis Competitor analysis Owners’ and managers’ résumés Owners’ and managers’ résumés Plan of operation Plan of operation Financial forecasts Financial forecasts

37. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-37 Financial Forecasts Projected financial statements Projected financial statements  Monthly for one year  Quarterly for next two Income statement Income statement Balance sheet Balance sheet Cash Flow Cash Flow Capital expenditures Capital expenditures

38. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-38 Financial Forecasts Three forecasts Three forecasts  Pessimistic  Most Likely  Optimistic Realistic! Realistic! Include assumptions on which forecasts are based Include assumptions on which forecasts are based (Continued)

39. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-39 Key Elements of a Business Plan Marketing strategy Marketing strategy (Continued) Competitor analysis Competitor analysis Owners’ and managers’ résumés Owners’ and managers’ résumés Plan of operation Plan of operation Financial forecasts Financial forecasts Loan/investment proposal Loan/investment proposal

40. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-40 Tips on Preparing a Business Plan Make sure your plan has an attractive cover (first impressions are crucial) Make sure your plan has an attractive cover (first impressions are crucial) Rid your plan of all spelling and grammatical errors Rid your plan of all spelling and grammatical errors Make your plan visually appealing Make your plan visually appealing Include a table of contents to allow readers to navigate your plan easily Include a table of contents to allow readers to navigate your plan easily

41. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-41 Make it interesting! Make it interesting! Use spreadsheets to generate financial forecasts Use spreadsheets to generate financial forecasts Always include cash flow projections Always include cash flow projections Keep your plan “crisp” – between 25 and 50 pages long Keep your plan “crisp” – between 25 and 50 pages long Tell the truth – always Tell the truth – always (Continued) Tips on Preparing a Business Plan

42. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-42 The "5 Cs" of Credit Capital Capital Capacity Capacity Collateral Collateral Character Character Conditions Conditions

43. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-43 Presenting the Plan Prepare! Prepare! Demonstrate enthusiasm, but don’t be overemotional Demonstrate enthusiasm, but don’t be overemotional Start by communicating the dynamic opportunity your business idea offers Start by communicating the dynamic opportunity your business idea offers “Hook” investors quickly with an up- front explanation of the venture, its opportunities, and its benefits to them “Hook” investors quickly with an up- front explanation of the venture, its opportunities, and its benefits to them

44. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-44 Use visual aids Use visual aids Hit the highlights; focus on the details later Hit the highlights; focus on the details later Keep your presentation “crisp” – 2 or 3 major points Keep your presentation “crisp” – 2 or 3 major points Avoid overloading your audience with technical jargon Avoid overloading your audience with technical jargon (Continued) Presenting the Plan

45. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-45 Presenting the Plan Answer every lender or investor’s question: “What’s in it for me?” Answer every lender or investor’s question: “What’s in it for me?” Close by reinforcing the nature of the opportunity Close by reinforcing the nature of the opportunity Be prepared (with details) for questions investors are likely to ask Be prepared (with details) for questions investors are likely to ask (Continued)

46. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-46 Presenting the Plan Learn to read the pattern of investors’ questions and address the issues that concern them Learn to read the pattern of investors’ questions and address the issues that concern them Follow up with every investor to whom you make your presentation Follow up with every investor to whom you make your presentation (Continued)

47. Chapter 6: Business Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-47 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall