Business Plans: Part 2

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This is the second article in a three part series. For Part 1 click here, for Part 3 click here

In our previous article we stated that up to 80% of business failures could have been avoided if they had developed and used a proper business plan. Research also shows that businesses that properly plan are significantly more likely to be more profitable and to achieve greater growth. Running a business without a plan is like going on a trip without a map, sufficient gas, money, or even a destination. Just as you wouldn't go on a vacation without some planning, no business can be successful without it. Putting that plan in writing helps you to think out a strategy for successfully operating and growing your business. Remember, if you fail to plan, you plan to fail.

The Questions

Where is your business today? Where will it be tomorrow? What is your mission statement? What product lines are profitable? Which ones aren't? What business do you think you are in? What business do your clients think you are in? Should you be in a different business? Is your product or service less attractive to your clients? How are competition, global commerce, technological and social changes affecting your company? What is your competitive strength? What are your weaknesses? Who are your biggest competitors? What are their weaknesses and strengths? What is your marketing strategy?

What are your projected income and expenses and cashflow for the next year? How about the next five years? Do you have a capital budget? What determines whether you buy an asset or not? Do you have an exit strategy? How will you manage growth? Do you have a financial plan? Do you have an operations plan? What definite sales and net profit targets have you set for this year and the next five years? What factors could interfere with the attaining of these goals? What contingency plans have you made to deal with such problems?

What we need to do is translate these questions into a roadmap for your business.

Outline of The Plan

Part 1 outlined the 10 key components of a business plan and for brevity these are reiterated below:

Executive Summary
Company Analysis
Industry Analysis
Analysis of Customers & Competition
Marketing Plan
Design & Development Plans
Operations Plans
Management Team
Financial Plan
Appendices

Components of the Plan

General

The first step in a business plan is to look at where you are now and analyse your surroundings (for example environment, competition, product positioning). This comprises items 2 to 4 above, namely Company Analysis, Industry Analysis, and Analysis of Customers and Competition. We can use some tools to aid this analysis and these will be discussed later.

The next step, having obtained all this information, is to examine this information and set strategies by which you can maximise your returns over the medium to long term. In doing so it is essential that you start by having a vision of where your business is heading. Next you can form a strategic approach. Then you can build your goals and your business plan around this approach.

The thing to remember is that your business is never in balance. You are always tweaking something for stability.

The Marketing Plan, Design & Development Plans, Operations Plans, Management Team and Financial Plan are all actions that you need to set in place in order to maximise your strategies. Conflicting constraints will mean that these plans are all inter-dependent.

The appendices provide supporting documentation such as statistics, product specifications, spreadsheets and calculations and other pertinent material upon which the plan is based.

Executive Summary

Although positioned at the front of the document, the Executive Summary is in fact the last section to get written. The executive summary is simply a synopsis of the main points in the plan which would be useful as an information sheet for executives and directors. The executive summary is usually on a separate page and one page or less.

Company Analysis

As stated in Part 1, company analysis provides a strategic overview of the current (or proposed business) and how it is currently organised

How is the business organised (e.g. private limited liability company, partnership, etc.)?
What opportunity is the company capitalizing on?
With what products and/or services?
How is the company and product/service unique? What makes the company qualified to succeed in this business?

Without objectively examining where you are now, it is difficult to determine where you should be heading. Identify what business you are in now.

Analysis of Industry, Customers and Competition

This is best demonstrated by Porter’s 5 Forces Model which is demonstrated below:

Threats of entry:

Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost advantages independent of scale
Government policy

Bargaining power of suppliers:

More concentrated than the industry
No substitutes
Industry an unimportant customer
Important to buyer’s business
Products differentiated
Threat of forward integration

Bargaining power of customers

You account for large proportion of sales
Concentrated
Product is a high percentage of cost structure
Product undifferentiated
Low switching costs
Low profits
Threat of backward integration
Product unimportant to final quality

Threat of substitutes

Offer attractive price/performance trade-off
Produced by industries earning high profits

Rivalry among competitors

Entry is likely
Competitors numerous
Competitors same size & power
Industry slow growth
No differentiation/switching costs
High fixed costs
High exit barriers
Perishable product

The key questions are:

What are the key forces at work in the competitive environment?
Are there underlying forces driving competitive forces?
Will competitive forces change?
What are the strengths and weaknesses of competitors in relation to the competitive forces?
Can competitive strategy influence competitive forces (eg. by building barriers to entry or reducing competitive rivalry)

With regard to customers you need to determine what your customers want. This will likely involve research in the form of questionnaires or surveys. Are you providing customers with the right quality products. Do customers want you to pitch your products differently within the market, provide better follow-up service, quicker delivery times? Will they be prepared to pay for this?

By answering these sorts of questions in conjunction with a competitor analysis you will be able to determine what are your Key Success Factors (KSF’s). Once you have determined your KSF’s it will be much easier for you to put together a plan which maximises these KSF’s.

PEST and SWOT Analyses

In pulling together your plan you need to examine the macro and internal environments. A PEST analysis is very useful for determining the macro environment and these are the external factors in Porter’s 5 Forces Model. The PEST Analysis is where you examine all external factors affecting your existing business and comprises the following:

Political/Legal

Monopolies legislation
Taxation policy
Enviro/employment legislation
Foreign trade regulations
Government stability

Economic

Business cycles
GNP trends/income trends
Interest rates/money supply
Inflation
Unemployment

Sociocultural

Demographics
Income distribution
Social mobility
Lifestyle changes
Work attitudes
Education
Consumerism

Technological

Govt spending on research
Focus on technical effort
New discoveries
Speed of technology transfer
Rates of obsolescence

A SWOT Analysis is a common tool for examining the other issues identified in Porters 5 Forces Model:

STRENGTHS

List all your strengths. Focus on:

Capabilities
Resources including human, organisational, tangible, intangible (reputation, culture)
Where else are you better positioned than your competitors
How do your products fare in comparison

WEAKNESSES

List all your weaknesses. Focus on:

Capabilities
Resources including human, organisational, tangible, intangible (reputation, culture)
Where else are you worse positioned than your competitors

OPPORTUNITIES

List areas where you believe that you see opportunities for growth. Focus on:

Competitive advantage
Your value chain (how you add value from sourcing materials through to supplying the customer)
Add value through repackaging, rebranding, providing higher quality products
Core competencies
Can the market be segmented
Niche markets
Expand sideways or grow geographically with same products

Threats

List areas where you believe that you see existing and potential competitive threats. Focus on:

How easily can your products be copied
How easily can your customer base be penetrated
Are entry barriers minimal and if so can these be changed
Is your brand identity threatened
Switching costs, eg. plastics for steel or carbon fibre for plastics
Buyer propensity to substitute
Relative price performance of substitutes

Core Competencies underpin any potential competitive advantage you will have over your competitors. It is essential that you identify these core competencies in the following areas:

Reducing Cost

Continual cost reduction
Economies of scale or scope
Control and coordination
Factor costs

Identifying Relevant Markets

Marketing skills and experience
Marketing culture

Adding Value

Customer culture
Value assurance
Value enhancement
Innovation

In our next issue of Financial & Business Advisor we will explain how all this information can be pulled together to form your plan.

FBA Editor

References: Massey University

MBA Programme Business Policy Module

Paul Wilton (editor)