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Section 2: The Entrepreneurial Journey Begins

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Essentials of Entrepreneurship and Small Business Management

Ninth Edition, Global Edition

Chapter 5

Crafting a Business Plan and Building a Solid Strategic Plan

Learning Objectives (1 of 2)

Explain the benefits of an effective business plan.

Describe the elements of a solid business plan.

Explain the “five Cs of credit” and why they are important to potential lenders and investors reviewing business plans.

In this chapter, you will:

1. Explain the benefits of an effective business plan.

2. Describe the elements of a solid business plan.

3. Explain the “five Cs of credit” and why they are important to potential lenders and investors reviewing business plans.

4. Understand the keys to making an effective business plan presentation.

Learning Objectives (2 of 2)

Understand the keys to making an effective business plan presentation.

Understand the importance of strategic management to a small business.

Explain why and how a small business must create a competitive advantage in the market.

Develop a strategic plan for a business using the nine steps in the strategic management process.

In addition, you will:

5. Understand the importance of strategic management to a small business.

6. Explain why and how a small business must create a competitive advantage in the market.

7. Develop a strategic plan for a business using the nine steps in the strategic management process.

Benefits of Creating a Business Plan

Business Plan:

A written summary of:

An entrepreneur’s proposed business venture

The operational and financial details

The marketing opportunities and strategy

The managers’ skills and abilities

A business plan is the best insurance against launching a business destined to fail or mismanaging a potentially successful company.

For decades, research has proved that companies that engage in business planning outperform those that do not. Most potential investors and lenders insist on a business plan as an essential step when considering funding an entrepreneurial venture. A business plan describes the direction the company is taking, what its goals are, where it wants to be, and how it intends to get there. It captures a full picture of the business model and all of the planning and preparation an entrepreneur undertakes when starting a business. The plan is written proof that an entrepreneur has performed the necessary research, has studied the business opportunity adequately, and is prepared to capitalize on it with a sound business model.

Essential Functions of a Business Plan

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

Attracting lenders and investors who will provide needed capital.

A business plan serves two essential functions. First, it provides a battery of tools – a mission statement, goals, objectives, budgets, financial forecasts, marketing plans, and entry strategies – to help entrepreneurs subject their ideas to one last test of reality before launching a business and serve as benchmarks to evaluate the progress of the business as it grows. The second function of a business plan is to attract lenders and investors.

A Plan Must Pass Three Tests

The Reality Test: proving that:

A market really does exist for your product or service.

You can actually build or provide it for the cost estimates in the plan.

The Competitive Test: evaluates:

A company’s position relative to its competitors.

Management’s ability to create a company that will gain an edge over its rivals.

The Value Test: proving that:

A venture offers investors or lenders an attractive rate of return or a high probability of repayment.

To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and investors: (1) the reality test, (2) the competitive test, and (3) the value test.

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.

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!

Building a business plan is one controllable factor that can reduce the risk and uncertainty of launching a company.

Key Elements of a Business Plan (1 of 5)

Title Page and Table of Contents

Executive Summary

A business plan should contain a title page with the company’s name, logo, and address as well as the names and contact information of the company founders.

To summarize the presentation to each potential financial institution or investors, the entrepreneur should write an executive summary. It should be concise – a maximum of one page – and should summarize all of the relevant points of the proposed deal.

Executive Summary

The executive summary is a written version of “the elevator pitch”

A good elevator pitch provides:

Context

Benefit

Target customers

Point of differentiation

Clincher

Like a good movie trailer, an executive summary is designed to capture readers’ attention and draw them into the plan. If it misses, the chances of the remainder of the plan being read are minimal.

Key Elements of a Business Plan (2 of 5)

Title Page and Table of Contents

Executive Summary

Mission and Vision Statement

Description of a Firm’s Product or Service

A mission statement expresses an entrepreneur’s vision for what his or her company is and what it is to become.

An entrepreneur should describe the company’s overall product line, giving an overview of how customers will use its goods or services. Drawings, diagrams, and illustrations may be required if the product is highly technical.

Product or Service Description

Describe the benefits customers get from the product or service

A feature is a descriptive fact about a product or service.

A benefit is what the customer gains from the product or service feature.

The emphasis of this section should be on defining the benefits customers get by purchasing the company’s products or services rather than on just a “nuts and bolts” description of the features of those products or services.

Key Elements of a Business Plan (3 of 5)

Title Page and Table of Contents

Executive Summary

Mission and Vision Statement

Description of a Firm’s Product or Service

Business and Industry Profile

Competitor Analysis

If one goal of creating a plan is to raise funding, the entrepreneur should include a section that acquaints lenders and investors with the industry in which the company competes. This section should provide readers with an overview of the industry or market segment in which the new venture will operate.

An entrepreneur should describe the new venture’s competition and the ways in which its business strategy will position it effectively against key competitors.

Competitor Analysis (1 of 2)

Who are the company’s key competitors?

What are there strengths and weaknesses?

What are their strategies?

How successful are they?

What distinguishes the entrepreneur’s product or service from others already in the market, and how will these differences produce a competitive edge?

The plan should include an analysis of each significant competitor and how well the competing business is meeting the important criteria that target customers use to make their purchase decisions among the various companies.

Key Elements of a Business Plan (4 of 5)

Title Page and Table of Contents

Executive Summary

Mission and Vision Statement

Description of a Firm’s Product or Service

Business and Industry Profile

Competitor Analysis

Market Entry Strategy

Marketing Strategy

The market entry section of a business plan addresses the question of how to attract customers. 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 from the competition.

Proving that a profitable market exists involves two steps: showing customer interest and documenting market claims.

Marketing Strategy (1 of 2)

Show customer interest

Prove that target customers actually need or want the product or service.

Document market claims

Support market size and growth rates with facts.

An important element of any business plan is showing how a company’s product or service provides a customer benefit or solves a customer problem. Entrepreneurs must be able to prove that their target customers actually need or want their goods or services and are willing to pay for them.

Entrepreneurs must support claims of market size and growth rates with facts, and that requires market research. Quantitative market data are important because it forms the basis for all of the company’s financial projections in the business plan.

Marketing Strategy (2 of 2)

Address:

Target market

Advertising and promotion

Market size and trends

Location

Pricing

Distribution

An effective market analysis should address the following items in detail, based on the framework developed in the business model.

Target market

Advertising and promotion

Market size and trends

Location

Pricing

Distribution

Key Elements of a Business Plan (5 of 5)

Title Page and Table of Contents

Executive Summary

Mission and Vision Statement

Description of a Firm’s Product or Service

Business and Industry Profile

Competitor Analysis

Marketing Strategy

Entrepreneurs’ and Managers’ Resumes

Plan of Operation

Pro Forma (Projected) Financial Statements

The Loan or Investment Proposal

A plan should include the résumés of business officers, key directors, and any person with at least 20% ownership in the company. This is the section of the plan in which entrepreneurs have the chance to sell the qualifications and the experience of their management team.

To complete the description of the business, an entrepreneur should construct an organization chart that identifies the business’s key positions and the people who occupy them.

One of the most important sections of a business plan is an outline of the proposed company’s financial statements – the “dollars and cents” of the proposed venture. An entrepreneur should carefully prepare projected (pro forma) financial statements for the operation for the next year using past operating data (if available), published statistics, and research to derive forecasts of the income statement, balance sheet, cash forecast (always!), and a schedule of planned capital expenditures.

The loan or investment proposal section of a business plan should state the purpose of the financing, the amount requested, and the plans for repayment or, in the case of investors, an attractive exit strategy.

Visualizing Risks and Rewards

Figure 5.1 Visualizing a Venture’s Risks and Rewards

Source: Based on William A. Sahlman, “How to Write a Great Business Plan,” Harvard Business Review, July/August 1997, pp. 98–108.

Figure 5.1 explains how two simple diagrams communicate effectively to investors both the risks and the rewards of a business venture.

Tips for a Good Business Plan

First impressions count! Use an attractive cover.

Checks for errors.

Make it visually appealing.

Include a table of contents with page numbers.

Make it interesting!

Show that it will make money.

Use spreadsheets for realistic financial forecasts.

Include cash flow projections.

Keep the plan “crisp.”

Tell the truth.

A plan is usually the tool an entrepreneur uses to make a first impression on potential lenders and investors. To make sure that impression is a favorable one, an entrepreneur should keep in mind these tips.

What Lenders and Investors Look for in a Business Plan

The “5 Cs” of Credit

Capital

Capacity

Collateral

Character

Conditions

To increase their chances of success when using their business plans to attract capital, entrepreneurs must be aware of the criteria lenders use to evaluate the creditworthiness of businesses seeking financing. Lenders and investors refer to these criteria as the five Cs of credit: capital, capacity, collateral, character, and conditions.

The Pitch: Presenting the Plan

The time allotted for presenting is usually less than 20 minutes, so it’s important to rehearse and be prepared.

A basic presentation should cover:

Your company and its products and services.

The problem to be solved.

A description of your solution to the problem.

Your company’s business model.

Your company’s competitive edge.

No matter how good a written business plan is, entrepreneurs who stumble through the presentation will lose the deal. Entrepreneurs who are successful at raising the capital their companies need to grow have solid business plans and make convincing presentations of them.

Tips for Making the Pitch (1 of 3)

Prepare

Practice your delivery and then practice some more.

Demonstrate enthusiasm about the business but don’t be overly emotional.

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.

Entrepreneurs should follow these tips when making a business plan presentation to potential lenders and investors.

Tips for Making the Pitch (2 of 3)

Use visual aids.

Follow the 10/20/30 rule for PowerPoint presentations.

Explain how your company’s products or services solve some problems and emphasize the factors that make your company unique.

Offer proof.

Hit the highlights.

Keep the presentation “crisp.”

Tips for Making the Pitch (3 of 3)

Avoid the use of technical terms that will be above most of the audience.

Remember to tell lenders and investors how they will benefit.

Be prepared for questions.

Anticipate questions and prepare for them in advance.

Focus your answers on what’s important to lenders and investors.

Follow up with every lender and investor to whom you make a presentation.

Building a Strategic Plan

Entrepreneurs must be able to adapt to changes in the marketplace.

Strategic planning is a tool that can help: it involves developing a game plan to guide the company as it works to accomplish its vision, mission, goals, and objectives and to keep it from straying off course.

It’s crucial to building a successful business.

The strategic plan gives everyone targets to shoot for, and it provides a yardstick for measuring actual performance against those targets, especially in the crucial and chaotic start-up phase of the business.

Building a Competitive Advantage

Developing a strategic plan is crucial to creating a sustainable competitive advantage: the aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market that is superior to its competitors.

Example: Whole Foods

Companies that fail to define their competitive advantage fall into “me-too” strategies that never set them apart from their competitors and do not allow them to become market leaders or to achieve above-average profits.

Define Competitive Advantage

Consider five aspects of a small company:

Products they sell

Service they provide

Pricing they offer

Way they sell

Values to which they are committed

Entrepreneurs should examine these five aspects of their businesses to define their companies’ competitive advantages.

The Key: Core Competencies

Unique set of capabilities a company develops in key areas, such as superior quality, customer service, innovation, team-building, flexibility, responsiveness, and others that allow it to vault past competitors.

They are what a company does best.

Best to rely on a natural advantage (often linked to a company’s “smallness”).

Example: Noodles & Company

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 serve its selected target customers better than its rivals.

Building a Sustainable Competitive Advantage

Figure 5.2 Building a Sustainable Competitive Advantage

The key to success is building the company’s strategy on its core competencies and concentrating on providing value for target customers.

Strategic Management Process (1 of 2)

Step 1: Develop a vision and translate it into a mission statement

Step 2: Assess strengths and weaknesses

Step 3: Scan environment for opportunities and threats

Step 4: Identify key success factors

Strategic management is a continuous process that consists of nine steps.

Strategic Management Process (2 of 2)

Step 5: Analyze competition

Step 6: Create goals & objectives

Step 7: Formulate strategies

Step 8: Translate plans into actions

Step 9: Establish accurate controls

Step 1: Develop a Vision and Create a Mission Statement (1 of 2)

Vision: the result of an entrepreneur’s dream of something that does not exist yet and the ability to paint a compelling picture of that dream for everyone to see.

A clearly defined vision:

Provides direction

Determines decisions

Inspires people

Allows for perseverance in the face of adversity

Highly successful entrepreneurs communicate their vision and their enthusiasm about that vision to those around them.

Step 1: Develop a Vision and Create a Mission Statement (2 of 2)

Mission statement: addresses the question: “what business are we in?”

Clarifies “why we are here” and “where we are going.”

Serves as a “strategic compass.”

Examples: Bongo World, Nisolo Shoes, Badger Mining, Putney, Inc., Clymb

Establishing the purpose of the business in writing gives a company a sense of direction.

Elements of a Mission Statement

Four key questions:

What are we in business to accomplish?

Who are we in to business to serve?

How are we going to accomplish that purpose?

What principles and beliefs form the foundation of the way we do business?

A sound mission statement need not be lengthy to be effective. In fact, shorter usually is better.

Step 2: Assess Company Strengths and Weaknesses

Use a balance sheet to identify:

Strengths

Positive internal factors a company can draw on to accomplish its mission, goals, and objectives.

Weaknesses

Negative internal factors that inhibit a company’s ability to accomplish its mission, goals, and objectives.

Building a successful competitive strategy requires a business to magnify its strengths and overcome or compensate for its weaknesses.

Step 3: Scan for Opportunities and Threats

Identify and manage:

Opportunities

Positive external factors the company can exploit to accomplish its mission, goals, and objectives.

Threats

Negative external factors that inhibit the firm's ability to accomplish its mission, goals, and objectives.

Once entrepreneurs have taken an internal inventory of company strengths and weaknesses, they must turn to the external environment to identify any opportunities and threats that might have a significant impact on the business.

Identifying and Managing Threats

Table 5.4 Identifying and Managing Threats

Source	Specific Threat	Severity (1 = Low, 10 = High)	Probability of Occurrence (0 to 1)	Threat Score (Severity × Probability, Max = 10)
1. Channels of distribution	Blank	Blank	Blank	Blank
2. Competition	Blank	Blank	Blank	Blank
3. Demographic changes	Blank	Blank	Blank	Blank
4. Globalization	Blank	Blank	Blank	Blank
5. Innovation	Blank	Blank	Blank	Blank
6. Waning customer or supplier loyalty	Blank	Blank	Blank	Blank
7. Offshoring or outsourcing	Blank	Blank	Blank	Blank
8. Stage in product life cycle	Blank	Blank	Blank	Blank
9. Government regulation	Blank	Blank	Blank	Blank
10. Influence of special interest groups	Blank	Blank	Blank	Blank
11. Influence of stakeholders	Blank	Blank	Blank	Blank
12. Changes in technology	Blank	Blank	Blank	Blank

Source: Based on Edward Teach, “Apocalypse Soon,” CFO, September 2005, pp. 31–32.

Table 5.4 provides a simple analytical tool to help entrepreneurs identify the threats that pose the greatest danger to their companies.

Step 5: Analyze the Competition (1 of 2)

Small business owners believe they operate in a highly competitive environment and the level of competition is increasing.

Yet, 97% of all U.S. businesses do not systematically track the progress of their key competitors.

Ask small business owners to identify the greatest challenge their companies face, and the most common response is competition.

Step 5: Analyze the Competition (2 of 2)

Goal of competitive intelligence:

Conduct continuous rather than periodic analysis of competition.

Avoid surprises from existing competitors’ use of new strategies and tactics.

Identify potential new competitors.

Improve reaction time to competitors’ actions.

Anticipate rivals’ next strategic moves.

The primary goals of a competitive intelligence program include the following:

● Conducting continuous rather than periodic analysis of competition

● Avoiding surprises from existing competitors’ new strategies and tactics

● Identifying potential new competitors

● Improving reaction time to competitors’ actions

● Anticipating rivals’ next strategic moves

Competitor Analysis (2 of 2)

Direct Competitors

Offer the same products and services

Customers often compare prices, features, and deals among these competitors when they shop

Significant Competitors

Offer some of the same or similar products or services

Product or service lines overlap but not completely

Indirect Competitors

Offer same or similar products in only a small number of areas

Sizing up the competition gives a business owner a realistic view of the market and his or her company’s position in it. Yet, not every competitor warrants the same level of attention in the strategic plan.

Step 6: Create Company Goals and Objectives

Goals: Broad, long-range attributes to be accomplished.

BHAGs

Inspire and focus the company

Goals are not intended to be specific enough for a manager to act on but simply state the general level of accomplishment sought.

Step 7: Formulate Strategies

Strategy: a road map of the actions an entrepreneur draws up to achieve a company’s mission, goals, and objectives.

It is the company’s game plan for gaining a competitive advantage.

By this point in the strategic management process, entrepreneurs should have a clear picture of what their businesses do best and what their competitive advantages are. They also should understand their firms’ weaknesses and limitations, as well as those of their competitors. The next step is to evaluate strategic options and then prepare a game plan to achieve the stated mission, goals, and objectives.

Porter’s Three Strategies

Strategy?

Cost Leadership

Differentiation

Focus

A strategy is the master plan that covers all the major parts of the organization and ties them together into a unified whole.

Three Strategic Options

Figure 5.4 Three Strategic Options

Source: Based on Michael E. Porter, Competitive Strategy (New York: Free Press, 1980), Chapter 2.

Three basic strategies identified by Michael Porter are cost leadership, differentiation, and focus.

Cost Leadership (1 of 2)

Goal: Be the low-cost producer in the industry or market segment.

Low-cost leaders have advantages:

Reaching buyers who buy on the basis of price.

The power to set the industry’s price floor.

A company pursuing a cost leadership strategy strives to be the lowest cost producer relative to its competitors in the industry.

Cost Leadership (2 of 2)

Cost Leadership works well when:

Buyers are sensitive to price changes.

Competing firms sell the same commodity products.

A company can benefit from economies of scale.

Examples: Dollar General and Dollar Tree

This strategy works well when buyers are sensitive to price changes, when competing firms sell the same commodity products and compete on the basis of price, and when companies can benefit from economies of scale.

Differentiation

Goal: Build customer loyalty by positioning its goods or services in a unique or different fashion.

Be special at something customers value.

Key: Build basis for differentiation on a distinctive competence, something that the small company is uniquely good at doing in comparison to its competitors.

Example: RentTheChicken.com

Small companies encounter risks when pursuing a differentiation strategy. One danger is trying to differentiate a product or service on the basis of something that does not boost its performance or lower its cost to customers. Another pitfall is trying to differentiate on the basis of something customers do not see as important.

Focus

Goal: Select one or more customer segments in a market, identify customers’ special needs, wants, or interests, and then target them with a product or service designed specifically for them.

Strategy builds on the differences among market segments.

Rather than try to serve the total market, the company focuses on serving a niche (or several niches) within that market.

Example: I Do Now I Don’t

A focus strategy recognizes that not all markets are homogeneous. In fact, in any given market, there are many different customer segments, each having different needs, wants, and characteristics. Businesses with a focus strategy sell to these specific segments rather than trying to sell to the mass market.

Step 8: Translate Strategies into Action Plans

Make plans workable by defining:

Purpose

Scope

Contribution

Resource requirements

Timing

Failure to implement a strategy effectively is a common problem. The lesson is that even sound strategies, unless properly implemented, will fail.

Step 9: Establish Accurate Controls

Plan establishes the standards against which actual performance is measured.

Entrepreneur must:

Identify and track key performance indicators.

Take corrective action.

So far, the planning process has created company objectives and has developed a strategy for reaching them, but rarely, if ever, will the company’s actual performance match stated objectives. Entrepreneurs quickly realize the need to control actual results that deviate from plans.

Dashboards (1 of 2)

A set of measurements unique to a company that includes both financial and operational measures.

Gives managers a quick, yet comprehensive, picture of a company’s overall performance.

To judge the effectiveness of their strategies, many companies use dashboards, a set of measurements that incorporate both financial and operational measures to give entrepreneurs and leadership teams a quick yet comprehensive picture of the company’s overall performance.

Sample Dashboard

Figure 5.6 Sample Dashboard for a Jewelry Store

Figure 5.6 shows a sample dashboard for a small jewelry store.

When creating dashboards for their companies, entrepreneurs should consider the following:

● Include graphics for strategic objectives and key success factors.

● Display data in such a way that the conclusions are clear for decision making.

● Help identify opportunities to improve profit margins.

● Allow for quick and definitive decisions.

● Offer an overall picture of the business that focuses everyone on the team on a common set of facts.

Dashboards (2 of 2)

Five Perspectives:

Customer: How do customers see us?

Internal Business: At what must we excel?

Innovation and Learning: Can we continue to improve and create value?

Financial: How do we look to shareholders?

Corporate Citizenship: Do we meet our responsibility to society as a whole, the environment, the community, and other external stakeholders?

Consider five important perspectives: customer, internal, innovation and learning, financial, and corporate citizenship.

Conclusion

The strategic planning process:

Begins with the nine steps.

Becomes more efficient each time.

Teaches entrepreneurial discipline for a higher chance of survival.