1. Copyright 2008 Prentice Hall Publishing 1 Chapter 4 Business Plan Conducting a Feasibility Analysis and Crafting a Winning Business Plan

2. Copyright 2008 Prentice Hall Publishing 2 Chapter 4 Business Plan 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. Copyright 2008 Prentice Hall Publishing 3 Chapter 4 Business Plan 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. Copyright 2008 Prentice Hall Publishing 4 Chapter 4 Business Plan Industry and Market Feasibility Product or Service Feasibility FinancialFeasibility Elements of a Feasibility Analysis

5. Copyright 2008 Prentice Hall Publishing 5 Chapter 4 Business Plan Industry and Market Feasibility Product or Service Feasibility FinancialFeasibility Elements of a Feasibility Analysis

6. Copyright 2008 Prentice Hall Publishing 6 Chapter 4 Business Plan 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. Copyright 2008 Prentice Hall Publishing 7 Chapter 4 Business Plan 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. Copyright 2008 Prentice Hall Publishing 8 Chapter 4 Business Plan 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

9. Copyright 2008 Prentice Hall Publishing 9 Chapter 4 Business Plan 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

10. Copyright 2008 Prentice Hall Publishing 10 Chapter 4 Business Plan 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 Number of competitors is large, or, at the other extreme, quite small Competitors are not similar in size or capacity Competitors are not similar in size or capacity Industry is growing fast Industry is growing fast Opportunity to sell a differentiated product or service exists Opportunity to sell a differentiated product or service exists

11. Copyright 2008 Prentice Hall Publishing 11 Chapter 4 Business Plan 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

12. Copyright 2008 Prentice Hall Publishing 12 Chapter 4 Business Plan 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 Many suppliers sell a commodity product Substitutes are available Substitutes are available Switching costs are low Switching costs are low Items account for a small portion of the cost of finished products Items account for a small portion of the cost of finished products

13. Copyright 2008 Prentice Hall Publishing 13 Chapter 4 Business Plan 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

14. Copyright 2008 Prentice Hall Publishing 14 Chapter 4 Business Plan 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 Customers’ switching costs are high Number of buyers is large Number of buyers is large Customers want differentiated products Customers want differentiated products Customers find it difficult to collect information for comparing suppliers Customers find it difficult to collect information for comparing suppliers Items account for a small portion of customers’ finished products Items account for a small portion of customers’ finished products

15. Copyright 2008 Prentice Hall Publishing 15 Chapter 4 Business Plan 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

16. Copyright 2008 Prentice Hall Publishing 16 Chapter 4 Business Plan 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. Advantages of economies of scale are absent. Capital requirements to enter are low Capital requirements to enter are low Cost advantages are not related to company size Cost advantages are not related to company size Buyers are not loyal to existing brands Buyers are not loyal to existing brands Government does not restrict the entrance of new companies Government does not restrict the entrance of new companies

17. Copyright 2008 Prentice Hall Publishing 17 Chapter 4 Business Plan 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

18. Copyright 2008 Prentice Hall Publishing 18 Chapter 4 Business Plan 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 Quality substitutes are not readily available Prices of substitute products are not significantly lower than those of the industry’s products Prices of substitute products are not significantly lower than those of the industry’s products Buyers’ switching costs are high Buyers’ switching costs are high

19. Copyright 2008 Prentice Hall Publishing 19 Chapter 4 Business Plan Five Forces Matrix

20. Copyright 2008 Prentice Hall Publishing 20 Chapter 4 Business Plan 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. 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. Copyright 2008 Prentice Hall Publishing 21 Chapter 4 Business Plan Industry and Market Feasibility Product or Service Feasibility FinancialFeasibility Elements of a Feasibility Analysis

22. Copyright 2008 Prentice Hall Publishing 22 Chapter 4 Business Plan 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? Are customers willing to purchase our good or service? Can we provide the product or service to customers at a profit? Can we provide the product or service to customers at a profit?

23. Copyright 2008 Prentice Hall Publishing 23 Chapter 4 Business Plan Product or Service Feasibility Analysis Primary research – collect data firsthand and analyze it. Primary research – collect data firsthand and analyze it. Customer surveys and questionnaires Customer surveys and questionnaires Focus groups 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

24. Copyright 2008 Prentice Hall Publishing 24 Chapter 4 Business Plan Industry and Market Feasibility Product or Service Feasibility Financial Feasibility Elements of a Feasibility Analysis

25. Copyright 2008 Prentice Hall Publishing 25 Chapter 4 Business Plan 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. Copyright 2008 Prentice Hall Publishing 26 Chapter 4 Business Plan The Business Plan A written summary of: A written summary of: an entrepreneur’s proposed business venture an entrepreneur’s proposed business venture its operational and financial details its operational and financial details its marketing opportunities and strategy its marketing opportunities and strategy its managers’ skills and abilities. its managers’ skills and abilities. Best insurance against launching a business destined to fail or mismanaging a potentially successful company. Best insurance against launching a business destined to fail or mismanaging a potentially successful company.

27. Copyright 2008 Prentice Hall Publishing 27 Chapter 4 Business Plan The Business Plan: Three 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. 3. Demonstrating that the entrepreneur understands the business venture and what will make it succeed.

28. Copyright 2008 Prentice Hall Publishing 28 Chapter 4 Business Plan A Plan Must Pass Three Tests The Reality Test - proving that : The Reality Test - proving that : a market really does exist for your product or service. a market really does exist for your product or service. you can actually build or provide it for the cost estimates in the plan. you can actually build or provide it for the cost estimates in the plan. The Competitive Test - evaluates: The Competitive Test - evaluates: a company’s position relative to its customers. a company’s position relative to its customers. management’s ability to create a company that will gain an edge over its rivals. management’s ability to create a company that will gain an edge over its rivals. The Value Test – proving that: The Value Test – proving that: a venture offers investors or lenders an attractive rate of return or a high probability of repayment. a venture offers investors or lenders an attractive rate of return or a high probability of repayment.

29. Copyright 2008 Prentice Hall Publishing 29 Chapter 4 Business Plan 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!

30. Copyright 2008 Prentice Hall Publishing 30 Chapter 4 Business Plan 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

31. The relationship among mission, goals, and objectives. Mission Goals Objectives

32. Copyright 2008 Prentice Hall Publishing 32 Chapter 4 Business Plan 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. Copyright 2008 Prentice Hall Publishing 33 Chapter 4 Business Plan Features versus 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. Copyright 2008 Prentice Hall Publishing 34 Chapter 4 Business Plan Key Elements of a Business Plan Marketing Strategy Marketing Strategy Competitor Analysis Competitor Analysis Description of Management Team Description of Management Team Plan of Operation Plan of Operation Forecasted Financial Statements Forecasted Financial Statements Loan or Investment Proposal Loan or Investment Proposal (continued)

35. Copyright 2008 Prentice Hall Publishing 35 Chapter 4 Business Plan Guidelines for Preparing a Business Plan Remember: No one can create your plan for you. Remember: No one can create your plan for you. Potential lenders want to see financial projections, but they are more interested in the strategies for reaching those projections. Potential lenders want to see financial projections, but they are more interested in the strategies for reaching those projections. Show how you plan to set your business apart from competitors; don’t fall into the “me too” trap. Show how you plan to set your business apart from competitors; don’t fall into the “me too” trap. Identify your target market and offer evidence that customers for your product or service exist. Identify your target market and offer evidence that customers for your product or service exist.

36. Copyright 2008 Prentice Hall Publishing 36 Chapter 4 Business Plan 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. Make it interesting. Make it interesting. (Continued)

37. Copyright 2008 Prentice Hall Publishing 37 Chapter 4 Business Plan Tips on Preparing a Business Plan Your plan must prove that the business will make money (not necessarily immediately, but eventually). Your plan must prove that the business will make money (not necessarily immediately, but eventually). 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)

38. Copyright 2008 Prentice Hall Publishing 38 Chapter 4 Business Plan The “Five Cs” of Credit Capital Capital Capacity Capacity Collateral Collateral Character Character Conditions Conditions

39. Copyright 2008 Prentice Hall Publishing 39 Chapter 4 Business Plan Presenting the Plan Demonstrate enthusiasm, but don’t be overemotional. Demonstrate enthusiasm, but don’t be overemotional. Know your audience thoroughly. Know your audience thoroughly. “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. Hit the highlights; focus on the details later. Hit the highlights; focus on the details later. Keep your presentation simple – 2 or 3 major points. Keep your presentation simple – 2 or 3 major points.

40. Copyright 2008 Prentice Hall Publishing 40 Chapter 4 Business Plan Presenting the Plan Avoid overloading your audience with technological jargon. Avoid overloading your audience with technological jargon. Use visual aids. Use visual aids. Close by reinforcing the nature of the opportunity. Close by reinforcing the nature of the opportunity. Be prepared (with details) for potential investors’ questions. Be prepared (with details) for potential investors’ questions. Follow up with every investor to whom you make your presentation. Follow up with every investor to whom you make your presentation. (Continued)