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Solution Manual For Preparing Effective Business Plans An Entrepreneurial Approach, 2nd edition Bruce R. Barringer Chapter 1-11

Contents Preparing Effective Business Plans An Entrepreneurial Approach, 2/e

Preface

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Chapter 1

Why Plan ......................................................................................................1

Chapter 2

Developing and Screening Business Ideas ......................................................15

Chapter 3

Feasibility Analysis ......................................................................................30

Chapter 4

Introductory Material, Executive Summary, and Description of the Business ....43

Chapter 5

Industry Analysis..........................................................................................56

Chapter 6

Market Analysis ...........................................................................................68

Chapter 7

Marketing Plan .............................................................................................80

Chapter 8

Management Team and Company Structure ...................................................94

Chapter 9

Operations Plan and Product (or Service) Development Plan .........................106

Chapter 10

Financial Projections ..................................................................................119

Chapter 11

Presenting the Plan with Confidence ............................................................131

Part I: Starting the Process Chapter 1 Why Plan? Key Words Business plan—a written document that carefully explains every aspect of a new business venture Due Diligence—the process investors go through after they tentatively commit to an investment Lean Startup Movement—associated with the school of thought that advocates experimentation and trial-and-error learning gleaned through customer feedback over formal planning Elevator speech—a brief, carefully constructed statement, usually 1—2 minutes long that outlines the merits of a business venture Stealth mode—companies that formulate their business plans in secret, to avoid tipping off potential competitors as to what they’re planning Feasibility Analysis—the process of determining if a business idea is viable; normally conducted prior to writing the business plan Corridor principle—an academic principle which states that once an entrepreneur starts a business, he or she begins a journey down a path where ―corridors‖ leading to new venture opportunities become apparent

Chapter Overview This chapter introduces the idea of the business plan, including the rationale for writing one, the multiple purposes that a business plan can serve both inside and outside the firm, and the key audiences for a business plan. Students will also learn about major imperatives in creating a business plan, as well as some potential pitfalls in writing the business plan. The organization of the text is also laid out by topic and associated chapter(s). The outline of the text walks the reader through the process from understanding and conceptualizing the plan, to preparing to write the plan, to creating the plan, and finally, to presenting the plan to potential investors and others.

Chapter Summary 1. 2.

A business plan is a written document that carefully explains every aspect of a new business venture. The most effective business plans are part of a comprehensive process that includes (1) identifying a business idea, (2) screening the idea (or ideas) to determine their preliminary feasibility, (3) conducting a full feasibility analysis, and (4) writing the plan. There are two primary reasons for writing a business plan: (1) it forces the founding team to work together to hammer out the details of the business venture, (2) it Copyright © 2015 Pearson Education, Inc.

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communicates the merits of a new venture to outsiders, such as investors or bankers. The process of writing a business plan forces a team to not only work together, but to turn abstract ideas into concrete realities. The two primary audiences for a firm’s business plan are the firm’s employees and investors and other external stakeholders. It is important to remember that a firm’s business plan, executive summary or a set of PowerPoint slides is typically the first aspect of a proposed venture that will be seen by an investor (or anyone else who reads the plan), and if the plan is incomplete or looks sloppy, it is easy for an investor to infer that the venture itself is incomplete or sloppy. To make the best impression, a business plan should follow a conventional structure. Typically, the individuals who read business plans are busy people who want a plan that allows them to easily find critical information. It is a good idea to develop a 1—2 minute elevator speech which briefly outlines the merits of the venture. As a business plan is written, the people involved should continually measure the type of company that they are hoping to start against their personal goals and aspirations. There are four types of businesses: survival, lifestyle, managed growth, and aggressive growth. This book focuses on lifestyle, managed growth, and aggressive growth firms. While the preparation of a business plan is essential, it is often an insufficient exercise through which to complete a full and candid analysis of the merits of a new business venture. Steps that logically precede the completion of a business plan, which include the preliminary screening of business ideas and feasibility analysis, are also important.

Chapter Outline I. II.

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Introduction Reasons for Writing a Business Plan a. Internal Reason b. External Reason Who Reads the Business Plan—And What Are They Looking For? a. A Firm’s Employees b. Investors and Other External Stakeholders Guidelines for Writing a Business Plan a. Structure and Style of the Business Plan i. Outside resources ii. Appearance iii. Develop an Elevator Speech 1. Four Steps in an Elevator Speech iv. Red Flags in a Business Plan b. Content of the Business Plan c. Measuring the Business Plan Against Your Personal Goals and Aspirations i. Investor expectations ii. Attractiveness of revised business plan d. Recognizing That Elements of the Plan May Change

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The Plan for the Book a. Section 1: Starting the Process b. Section 2: What to Do Before the Business Plan Is Written c. Section 3: Preparing a Business Plan d. Section 4: Presenting the Business Plan to Investors and Others

Chapter Notes I.

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Introduction Research reveals an increased interest in the study of entrepreneurship o More than 2,000 colleges and universities, about two-thirds of the total, offer entrepreneurship coursework o 54 percent of millennials (ages 18-34) either want to start a business or have already started one o 63 percent of African Americans and 64 percent of Latinos expressed a desire to start their own company The business plan is a written document that carefully explains every aspect of a new business venture o Inside the firm, the business plan is used to develop a ―road map‖ o Outside the firm, it introduces potential investors and other stakeholders to the business opportunities Although a relatively small percentage of entrepreneurs write business plans, there is ample evidence that writing a business plan is an extremely good investment of time and money. Reasons for Writing a Business Plan There are two primary reasons for writing a business plan o Internal reason—forces the founders of a firm to systematically think through each aspect of their new venture o External reason—communicates the merits of a new venture to outsiders, such as investors and bankers  Investors rely heavily on the business plan to make their decisions regarding initial investment  The business plan helps a new company build credibility by providing detailed information and demonstrating that the entrepreneur has thought through each element of the business  Placing highly or winning a university-, community-, or statesponsored business plan competition also helps to establish credibility for a firm

There is an emerging school of thought, associated with the Lean Startup movement, that opposes the idea of writing a business plan and advocates experimentation and trial-and-error learning through customer feedback over formal planning Who Reads the Business Plan—And What Are They Looking For? There are two primary audiences for a firm’s business plan Copyright © 2015 Pearson Education, Inc.

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A firm’s employees—because the business plan articulates the vision and future of the firm, both the management team and the rank-and-file employees can benefit from reading the business plan in order to operate in sync and with purpose Investors and other external stakeholders—investors, potential business partners, potential customers, private and government-funded grantawarding agencies, and key employees who are being recruited are all part of the second audience for a business plan  To appeal to this group, the business plan must be clear, concise, and not overly optimistic or naive

Guidelines for Writing a Business Plan It is important to remember that a firm’s business plan, executive summary, or a set of PowerPoint slides is typically the first aspect of a proposed venture that will be seen by an investor or whomever the plan is presented to A good business plan will be sensitive to the structure, style, and content of a plan before exposing it to a firm’s employees or sending it to an outsider Individuals writing the plan should also measure the type of company that they are envisioning against their personal goals, aspirations, and preferred lifestyle Structure and Style of the Business Plan  The business plan should follow a conventional structure  Most experts recommend a length of between 25 and 35 pages  Effective business plans should be sharp, but not look expensive to produce or overly flashy  Business plan software can help provide structure, but all of the content should come from the entrepreneur  Outside assistance in putting the plan together is fine, but the enthusiasm of the founder should remain i.

Develop an Elevator Speech  An elevator speech is a brief, carefully constructed statement, usually 45 seconds to two minutes long that outlines the merits of a business venture (business plan insight feature) 1.

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Steps in an Elevator Speech (from business plan insight feature)  Describe the opportunity—45 seconds  Describe how your product or service meets the opportunity—45 seconds  Describe your qualifications—15 seconds  Describe your market—15 seconds

Red Flags in a Business Plan (Table 1-2)  Founders with none of their own money at risk  A poorly cited plan  Defining the market size too broadly  Overly aggressive financials Copyright © 2015 Pearson Education, Inc.

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Hiding or avoiding weakness Sloppiness in any area Too long of a plan

Content of the Business Plan  Most plans are divided into sections that represent the major aspects of a new venture’s business (Table 1-1)  The plan should convince the reader that the opportunity is exciting, feasible, defensible, and within the capabilities of the people who will be launching the firm  Details of each section of the plan will be described later in this book in Section 3: Preparing an Effective Business Plan Measuring the Business Plan Against Your Personal Goals and Aspirations  Accepting venture capital will almost assuredly force a firm into a fastgrowth model from the start o Most venture capitalists shoot for a 30 to 40 percent annual return and a total return of five to 20 times their original investment over the life of the investment  Using venture capital also involves surrendering equity in the firm to outsiders in exchange for their investment and accepting heavy scrutiny at all levels  If an entrepreneur places a high value on leisure time or family time or doesn’t want the pressure associated with a group of investors, he or she would be better suited to launch a firm in a target (or niche) market and solicit funds from friends and family or a lender  During the course of writing the plan, the entrepreneur may find that there are aspects to the business that are not as attractive as originally anticipated Recognizing That Elements of the Plan May Change  Revisions may be made based on early feedback  The corridor principle is an academic principle which states that once an entrepreneur starts a business, he or she begins an journey down a path where ―corridors‖ leading to new venture opportunities become apparent  The corridor principle also applies during the preparing of a business plan; new insights will invariably emerge that weren’t initially apparent  The business plan is a living, breathing document, rather than something set in stone  Guy Kawasaki suggests that authors of business plans should ―write deliberate, (but) act emergent‖ o Create a ―deliberate‖ plan that is a specific blueprint to follow o Think ―emergent‖ with a mindset that is open to change and influenced by the realities of the marketplace Types of Businesses There are four distinct types of businesses (Table 1-3) o Survival—provides its owner just enough money to put food on the table and pay bills (handyman, part-time childcare)

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Lifestyle—provides its owner the opportunity to pursue a certain lifestyle and make a living at it (clothing boutique, personal trainer) o Managed growth—employs 10 or more people, may have several outlets, and may be introducing new products or services to the market (regional restaurant chain, multi-unit franchise) o Aggressive growth—bringing new products and services to the market and has aggressive growth plans (computer software, medical equipment, national restaurant chain) This book focuses primarily on lifestyle, managed growth, and aggressive growth firms

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The Plan for the Book Section 1: Starting the Process (Chapter 1) A business plan is also an essential document for a firm to have at its disposal, particularly if it plans to reach out to others to try to gain access to resources Section 2: What to Do Before the Business Plan Is Written (Chapters

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Writing a business plan is part of a comprehensive process that includes the four steps of the comprehensive feasibility analysis/business planning process There are many steps that logically precede the completion of a business plan, including the preliminary screening of business ideas and feasibility analysis

Section 3: Preparing a Business Plan (Chapters 4-10) This section provides an explanation of how to complete each section of a business plan

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Section 4: Presenting the Business Plan

Concrete suggestions for how to make effective presentations using PowerPoint slides, and how to field questions from an audience effectively, will be provided

Review Questions 1.

What is a business plan? What are the advantages to preparing a business plan for a new venture? Answer: A business plan is a written document that carefully explains every aspect of a new business venture. The advantages to preparing a business plan are that inside the firm, it acts as a ―road map‖ for the execution of strategies and plans. Outside the firm, it introduces the business opportunity to potential investors and other stakeholders. Many investors won’t even consider a firm that does not have a business plan. Finally, the process of writing the plan forces the entrepreneur to examine the merits of the business idea and test its feasibility. Copyright © 2015 Pearson Education, Inc.

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What are the two most common reasons that entrepreneurs write business plans? Answer: The most common reasons for writing a business plan are that it forces the founding team to work together to hammer out the details of the business venture, and it communicates the merits o f a new venture to outsiders such as investors or bankers.

Who are the primary consumers of business plans? In what ways do the people who read business plans differ in the information they are looking for? Answer: The primary consumers of a business plan are the firm’s employees, investors, and other external stakeholders. A firm’s employees may use the business plan as a guideline to ensure that all their activities are in sync with the vision and plan of the founders. Investors and other external stakeholders are looking for demonstration that the business idea is viable and can offer an attractive financial return when compared with lower risk investment alternatives.

It is often argued that the process of writing a business plan is as important as the plan itself. How is this so? Answer: The process of working together on a business plan requires the founders to systematically think through each aspect of their new venture and forces team members to turn abstract ideas into more concrete realities.

Why is it important for the founders of a firm to continually measure whether the type of company they are envisioning, as described by their business plan, is consistent with their personal goals and aspirations? Answer: It is important that the founders use the business plan writing process to visualize what the firm will look like in terms of the demands on their time, the pressures of accepting venture capital, and the need to accept investor scrutiny over operational decisions for the firm. If an entrepreneur wants to ensure a significant amount of leisure or family time, this should be taken into consideration before moving forward with an aggressive growth business.

What are the hazards involved with using a software package to help write a business plan or hiring consultants to write the business plan for you? Answer: Software packages and outside consultants are useful in providing a conventional format for the business plan, but over-reliance on these sources can produce a business plan that looks ―canned‖ or fails to convey the enthusiasm and excitement of the entrepreneur’s vision.

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Describe the general rules of thumb for the length and appearance of a business plan. Answer: Most experts agree that the plan should be between 25 and 35 pages in length. It should be clear, concise, and follow a conventional format. It should look sharp, without looking like the entrepreneur spent too much to produce it. The plan’s author should also avoid overuse of clip art and other design elements, but a well-designed logo can add to the professionalism of the plan.

Why is it important for a firm to test the feasibility of its business idea prior to writing a business plan? Answer: There are steps that naturally precede the completion of a business plan. The results of a full feasibility analysis will help the entrepreneur to decide whether it is worthwhile to go forward with the business plan.

Why is it important for a firm to test the feasibility of its business idea prior to writing a business plan? Answer: Many new businesses fail, not because the founders didn’t work hard or weren’t committed to the venture, but because the idea wasn’t a good one to begin with. Conducting a feasibility analysis helps assess the merits of a business idea prior to dedicating the time and effort to write a business plan.

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What is an elevator speech? How can developing an elevator speech help a firm write a more effective business plan? Answer: An elevator speech is a 45-second to two-minute statement outlining the merits of a business venture. Creating an elevator speech can help the founders to develop a sharp and concise description of their business.

Application Questions 1.

Justin Wells is one of three founders of an organic snacks company. The founders have decided to write a business plan to try to obtain funding. In a meeting with his cofounders, Justin said, ―I know that we’re all very busy, so I’d like to volunteer to write the business plan. My parents have a cabin on a lake about an hour from here, so if it’s alright with the two of you, I’d like to take my laptop up to the cabin for a couple of days and hammer out the business plan. Any objections?‖ If you were one of Justin’s cofounders, what would you say? What alternative approach, if any, would you suggest to writing the plan? Answer: As one of Justin’s cofounders, I should consider the fact that the process of writing the plan should be a collaborative effort. Writing the plan together can help the team develop a stronger bond and identify potential problems within the team. We should suggest that, following the feasibility analysis, the three founders have a retreat at Justin’s parents’ cabin and begin work on the business plan writing process together.

Melanie Scott is a high school math teacher who is in the process of developing an iPhone app centered on engaging games that require high school students to use math to Copyright © 2015 Pearson Education, Inc.

x master the games. Melanie is planning to attend a new business conference in about six weeks that will feature a number of investors. She hopes to make some contacts and schedule follow-up meetings with several investors. Up until now, Melanie has focused primarily on the technical aspects of building the app, and hasn’t written a business plan or talked to any potential customers. She’s willing to do whatever it takes to get prepared for the conference. What would you tell Melanie to focus on over the next six weeks to get ready for the conference? Answer: Since Melanie will be at a conference with other new business founders, she needs to prepare a business plan to use as a selling tool. An investor choosing between two or more business ventures may eliminate one that does not have a professional business plan for them to review. Melanie should also get feedback from potential users and work on an elevator speech to use when speaking with investors at the conference. 3.

A year ago, a friend of yours opened in innovative type of fitness center that helps high school athletes improve their fitness and sharpen their skills to the point where they’ll be more likely candidates for college scholarships. He recently wrote a business plan seeking $100,000 in funding to expand from one location to three locations. He sent the business plan out to three industry experts for feedback, and was struck by the advice re received. All three experts loved his concept and encouraged him that instead of asking for $100,000 to expand to three locations, he should ask for $1 million to expand to 30 or more locations. What factors should your friend consider before he pursues this advice? Answer: He should measure the suggested business plan and expert advice against his personal goals and aspirations. Investors will expect a 30-40 percent annual return over the period of their investment. They will also open the firm to increased input and scrutiny since the investors will now own a stake in the business. Further, the type of aggressive growth advised by the industry experts will drastically chance the amount of time and attention required by the founder. He should be sure that he is willing to spend that amount of time away from personal and family concerns.

Imagine you just received a text message from a friend. The message reads, ―Just wanted to share with you some fantastic news. Last Friday, I talked to an investor about my business idea, and he asked me to send him the executive summary from my business plan along with a PowerPoint overview of the plan. I spent the weekend working on his requires, and am about to send him an 8-page executive summary and a 42-slide PowerPoint overview. Just thought I would check with you to see if you have any last minute words of advice. I really want to get funding.‖ How would you respond to this request for feedback? Answer: To make the best impression, a business plan should follow a conventional structure. This includes the executive summary and slide deck. The executive summary should only be 1-2 pages long and the PowerPoint overview should be about 12 slides long. The executive summary and slide deck that this founder plans does not recognize the fact that the investor is a busy person who wants a document that provides a very quick snapshot of the key information regarding the business. If the investor is interested, he or she will ask for a 25-35 page plan.

Spend some time studying the website of Heart Juice (www.heartjuice.com), a healthy beverage company referred to in the chapter. Search for additional information on the Copyright © 2015 Pearson Education, Inc.

xi company. Write a two minute elevator speech rather than a 60-second elevator speech. Answer: Student responses will vary, but should cover the four steps of an elevator speech: Step 1: Describe the opportunity or problem that needs to be solved. Answers will vary, but may include information such as documentation of the increased interest in products that support a healthier lifestyle and the high incidence of cardiac events in the target population. Step 2: Describe how your product or service meets the opportunity or solves the problem. Answers will vary but might explain how Heart Juice provides a healthier option than more commonly consumed beverages that have fewer health benefits. They may also explain the health effects of the hawthorne berry, a key ingredient of Heart Juice. Step 3: Describe your qualifications. Answers will vary but might include the personal story of how the founders were inspired following the heart attack of a professor of one founders, a heart attack by the father of another founder, and the high cholesterol diagnosis of a parent of the third founder. Step 4: Describe your market. Student answers will vary but might address the large number of Americans suffer adverse cardiac events, the world’s number one killer.

Additional Activities 1. I Know Someone Who… Purpose: to help students meet other students in your new class, and help students build their network of people who can help connect them to professionals. This is a good exercise for the first day of class. To prepare for this exercise, create a one-page handout listing many different professions such as attorney, accountant, consultant, banker, angel investor, venture capitalist, website developer, etc. These are the kinds of professionals a startup would benefit from. Begin by asking students to first think of professionals in these categories whom they personally know, and would go to with questions. Then each student is given a handout, told to stand up, leave the classroom (if possible) and network with each other. Tell them how much time you can allow for the exercise. They have two objectives to accomplish:

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Introduce them self and get to know as many other students as possible. Write other students’ names on their handout who may know a professional they need. o For example, Chris introduces herself to Pat, and asks Pat if he knows anyone who is a professional listed on the handout. If Pat knows a Copyright © 2015 Pearson Education, Inc.

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good attorney, then Chris will write Pat’s name next to the word attorney on the handout. 2. Virtual Incubator Tour Purpose: to introduce students to business incubators If you have Internet access in your classroom, take your students on a virtual tour of an incubator. If you do not have classroom access, then you can assign your students to find an incubator’s website to take a virtual tour. If you would like to link directly to an incubator, then visit the University of Central Florida Business Incubator Program in Orlando, Florida, at http://www.incubator.ucf.edu/index.html. You could assign your students to find an incubator on their own by conducting a Google search, starting with http://www.nbia.org/, the National Business Incubator Association (NBIA).

3. Business Plan Competition Purpose: to enhance retention of course concepts and encourage students to apply what they learn Does your college or university participate or sponsor a business plan competition? Encourage your students to enter a competition. This is a great way to generate enthusiasm at the beginning of the term that can carry all the way through to the end of the term. Even if your college or university does not have a business plan competition, there are many events throughout the country that students can explore. Check out the BPC website (http://www.bizplancompetitions.com/) to find a listing of many different business plan competitions.

4. Elevator or Quick Pitch Purpose: to encourage students to practice presenting their new business concepts Although some colleges and universities put on quick pitch or elevator speech competitions, you can easily have a competition in your classroom. Have each student prepare and deliver a oneminute presentation to the class to inform and persuade the class of the viability of a new business concept. Students are not pitching a great idea, team, or product. Instead, they are pitching what their business will do for investors and for customers. Therefore, they should pitch how their business will solve a tangible problem that exists today. Their pitch must have some kind of ―hook‖ that will immediately spark interest in the audience. They must demonstrate that they, personally, are very excited about their own concept. Finally, they should close their pitch with some kind of request for action from the listeners, such as a request for funding or to join the founding team. This YouTube video of an award-winning pitch (http://www.youtube.com/watch?v=BIoenMAIxE) is only one of many to help students prepare their pitch.

xiii You could use the pitch assignment early in the term to form teams. Instead of pitching a business concept, a student could practice preparing and delivering a pitch by attempting to persuade other students to join his or her team. In this case, students will pitch what they can do for the team.

Part II: What to do Before the Business Plan is Written Chapter 2 Developing and Screening Business Ideas Key Words First screen—a mechanism for quickly assessing the merits of a business idea before subjecting it to full feasibility analysis and business planning Brainstorming—a catch phrase that generally describes a session targeted to a specific topic about which a group is instructed to come up with ideas Focus group—a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed Window of opportunity—a metaphor describing the time period in which a firm can realistically enter a new market Barrier to entry—a condition that creates a disincentive for another firm to enter a company’s niche market

Chapter Overview This chapter walks students through the process of testing specific ideas to determine if a good business opportunity truly exists. The chapter is divided into two parts: (1) a focus on the three most common sources of new business ideas and (2) the introduction of a tool called the ―First Screen.‖ An explanation of the components of the First Screen is included, including resources that entrepreneurs may use to locate required information.

Chapter Summary 1. 2.

The three most common sources of new business ideas include: changing environmental trends, unsolved problems, and gaps in the marketplace. The most important environmental trends to follow, in the context of discovering new business ideas, are economic trends, social trends, technological advances, and political action and regulatory changes. Many companies have been started by people who have experienced a problem in their lives, and then realized that the solution to the problem represented a business opportunity. Gaps in the marketplace exist when there are products or services that consumers want but aren’t available through larger firms or aren’t available at all.

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Three techniques that entrepreneurs use to generate new business ideas include: brainstorming, focus groups, and library and Internet research. The most common way to identify business ideas quickly is through brainstorming. Technically, a brainstorming ―session‖ is targeted to a specific topic about which a group of people are instructed to come up with ideas. A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas. Often, the best new business ideas emerge when the general notion of an idea is merged with extensive library and Internet research. Once a business idea, or several ideas, have been chosen, it is important to have a way to quickly assess the merits of the idea, before subjecting the idea to a full feasibility analysis. The First Screen provides a mechanism for quickly assessing the merits of a business idea. Although completing the First Screen does take some research and analysis, it is not meant to be a lengthy process. It contains 25 items and should be able to be completed in less than an hour.

Chapter Outline I. II.

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Introduction Three Most Common Sources of New Business Ideas a. Changing Environmental Trends (Table 2-1) i. Economic Trends ii. Social Trends iii. Technological Advances iv. Political Action and Regulatory Changes b. Unsolved Problems c. Gaps in the Marketplace Techniques for Generating Ideas a. Brainstorming b. Focus Groups c. Library and Internet Research First Screen a. Part 1: Strength of the Business Idea b. Part 2: Industry-Related Issues c. Part 3: Market and Customer-Related Issues d. Part 4: Founder- (or Founders-) Related Issues e. Part 5: Financial Issues

Chapter Notes I.

Introduction  Many businesses fail, not due to a deficit of commitment and hard work, but because the idea wasn’t a good one to begin with  New business ideas require good detective work to determine if they are indeed viable

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There are techniques that entrepreneurs can use to explore the three most common sources for new business ideas The First Screen is a tool that provides entrepreneurs with the flexibility to consider multiple business ideas, rather than settling on a single idea from the outset

Three Most Common Sources of New Business Ideas  The first step in creating an effective business plan is selecting an idea that fills a need and provides unique value to the customer  It is difficult to get people to change habits and behaviors to try a new product even if the new product is better or less expensive a.

Changing Environmental Trends o Changes in these areas often provide the impetus for new business ideas o It is important to distinguish between trends and fads o Trends are interconnected and should be considered simultaneously when brainstorming for new ideas i.

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Economic Trends When the economy is strong, people are more willing to buy discretionary products and services It is important to evaluate who has money to spend and what they spend it on (i.e., the increase of women in the workforce fueled a number of boutique clothing stores targeting professional women) An understanding of economic trends can also help identify areas to avoid (i.e., the advent of online auction sites like eBay has made it easy for people to sell used musical instruments, making this a difficult time to start a company selling musical instruments) Social Trends Entrepreneurs must also understand the impact of social trends on the way people live their lives and the products and services they need Often products do more to satisfy a social need than the more transparent need the product fills Technological Advances Technological advances provide an ongoing source of new business ideas It is important to recognize how technologies can be used to help satisfy basic or changing human needs

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Once a technology is created products often emerge to advance it (i.e., the Apple iPod has created an entire industry that produces accessories) Political Action and Regulatory Changes New laws create opportunities for entrepreneurs to start firms to help companies and individuals comply with these laws Occasionally, changes in government regulations motivate entrepreneurs to start firms that differentiate themselves by ―exceeding‖ the regulation (i.e., an ―extra safe‖ crib) Political change can also create an environment for the emergence of new business ideas (i.e., threat of terrorism resulted in many firms becoming more security conscious and requiring products to meet their changing security needs)

Unsolved Problems o Many companies have been started by people who have experienced a problem and, in the process of solving the problem, realized that they were on to a business idea o Advances in technology often result in problems for people who can’t use the technology in the way it is sold to the masses— entrepreneurs who can develop modified products and services can often capitalize on this opportunity o One technique that entrepreneurs use in solving a difficult problem is to find an instance where a similar problem was solved and then apply that solution to their problem

Gaps in the Marketplace o There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all o Key large retailers compete on price and target the mainstream customer, leaving gaps in the marketplace that boutiques and specialty shops can fill o A related technique for generating new business ideas is to take an existing product or service and create a new category by targeting a completely different target market or geographic area

Techniques for Generating Ideas  Some people recognize new business ideas through casual observation, intuition, or even serendipity or luck  Some people use the three sources of business ideas to deliberately try to generate new business ideas  This section focuses on three techniques that people utilize to explicitly try to generate new business ideas Copyright © 2015 Pearson Education, Inc.

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Brainstorming o Brainstorming is the most common way to generate business ideas o A brainstorming ―session‖ is targeted to a specific topic about which a group of people are instructed to come up with ideas o In brainstorming, the leader asks participants to share their ideas and react to the ideas of other participants in a lively, freewheeling manner o A flip chart or whiteboard is often used to record ideas o One particularly effective approach to brainstorming is to utilize the three sources for new business ideas as a way of organizing the discussion

Focus Groups o A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issues being discussed o Focus groups usually work best as a follow-up to brainstorming, when the general idea for a business has been formulated o Focus groups are usually conducted by trained moderators who know how to keep the group ―focused‖ and generate lively discussion o One hybrid type of focus group is the ―College Drop-In,‖ where college students are provided with a food and snack budget in exchange for the opportunity to hold brief videotaped interviews with partygoers about specific market issues or business ideas

Library and Internet Research o Entrepreneurs would be making the mistake of overly linear thinking to assume that the process of researching does not begin until after the business idea has been chosen o Often the best ideas emerge when the general notion of the idea is merged with extensive library and Internet research o The best approach to using the library, an often underutilized source of information, is to discuss your general area of interest with a reference librarian o Internet research is also important, including the use of search engines and ―alerts‖ using keywords that pertain to your topic of interest

First Screen  Once a business idea has been chosen, it is important to have a way to quickly assess the merits of the idea before subjecting it to full feasibility and business plan  The ―First Screen‖ is an entrepreneur’s first pass at assessing the feasibility of a business idea  Completing the First Screen is not intended to be either a lengthy process or a shot in the dark Copyright © 2015 Pearson Education, Inc.

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The First Screen contains 25 items and should be able to be completed in less than an hour (the five items per topic are highlighted below and in the text) a.

Part 1: Strength of the Business Idea (five criteria) o (1) High potential ideas are typically drawn from one of the three sources of business ideas and are timely in terms of market introduction o (2) For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open o (3) A new idea must ―add value‖ for its buyer or end user in some appreciable way o (4) New business ventures aimed at replacing products that people are reasonably satisfied with may have a difficult time succeeding o (5) Investors are typically skeptical of business ideas that require people to make meaningful changes in behavior

Part 2: Industry-Related Issues (five criteria) o Researchers have found that 8 to 30 percent of the variation in firm profitability is directly attributable to industry factors such as  (1) The number of competitors  (2) Current lifecycle stage of industry  (3) The growth rate of industry  (4) The relative importance of the industry’s products or services to its customers  (5) Average operating margins for the firms in an industry are also important

Part 3: Market- and Customer-Related Issues (five criteria) o (1) Identification of the target market in which the firm competes is extremely important. o A target market is a place within a larger industry or market segment that represents a narrower group of customers with similar interests o (2) The ability to create barriers to entry, a condition that creates a disincentive for another firm to enter the company’s niche market, is an important aspect of any firm’s potential competitive advantage  Economies of scale  Product differentiation  Unique access to distribution channels  Intellectual property protection such as patents o (3) Entrepreneurs should also consider the purchasing power of potential customers o (4) The ease of making customers aware of the new product or service is also important o (5) Another important issue is the growth potential of a firm’s target market

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Part 4: Founder- (or Founders-) Related Issues (five criteria) o The potential founder should also complete a self-assessment that is forthright and fair, understanding that few firms will score high on each of the five dimensions o The attributes that make for a strong founding team include (1) Experience in the industry the new venture is entering (2) Skills as they relate to the new venture’s product or service (3) Social and professional networks in the industry the firm will be entering (4) Personal goals and aspirations that are consistent with the firm (5) Likelihood that a team can be put together to launch and grow the new venture

Part 5: Financial Issues (five criteria) o (1) The initial capital investment needed to start a firm is important  At this point, the entrepreneur should have a sense of the magnitude of the investment; exact estimates will be developed later if the idea is indeed viable  The average small business is started for about $10,000 with the majority coming from the owners’ personal savings o

o o o

(2) The number of revenue drivers that a business has is also important  Start-ups don’t want to lose focus by creating multiple revenue drivers, but the financial potential of a firm is greater if it has several ways of generating sales (3) The time it takes a firm to break even or recoup its initial investment is also important (4) The next issue to consider is to assess the financial performance of businesses similar to the one you are contemplating (5) The final item in Part 5 refers to your ability to fund the initial product development and initial start-up expenses for your venture from personal funds or via bootstrapping

Review Questions 1.

What are the three most common sources of new business ideas? Briefly describe how each of the sources spawns potential business ideas. Answer: The three most common sources of new business ideas are: (1) changing environmental trends—if entrepreneurs are able to distinguish between trends and fads, they can take advantage of various environmental changes. Most start-ups are not sufficiently funded to ramp up quickly enough to capitalize on fads; (2) unsolved problems—many companies have been started by people who have experienced and problem. In the process of solving the problem, they have realized that they were on to a Copyright © 2015 Pearson Education, Inc.

xx business idea; and (3) gaps in the marketplace—products that consumers need or want that aren’t available in a particular location or aren’t available at all.

What four environmental trends provide the richest sources of new business ideas? List each environmental trend and provide an example of the type of business idea that it might create. Answer: (1) economic trends, (2) social trends, (3) technological advances, and (4) political action and regulatory changes. Types of business ideas will vary.

Explain how ―unsolved problems‖ can create a business idea. Provide an example that was not mentioned in the chapter of a business that was created by solving an unsolved problem. Answer: Often an entrepreneur will attempt to solve a problem that he, or someone he knows, is having. Once he has successfully solved the problem for himself, he will realize that his idea represents a sustainable business opportunity. Student examples will vary.

Explain how finding a gap in the marketplace can lead to new business ideas. Answer: Gaps in the marketplace can often be targeted by niche companies. Large, mainstream companies can compete on price but often lack the ability to sell products or services to those who don’t fit into the mainstream model due to geographic location, personal style, or comparatively small market size. These ―outside of mainstream‖ targets are often a perfect fit for a start-up.

Describe the four categories of new business ideas and the most realistic categories for new firms. Answer: Existing markets, new markets, existing products, and new products are the four categories of new business ideas. The most realistic categories for new firms are new products in existing markets or existing products in new markets.

Describe the brainstorming process. How can brainstorming be used to generate new business ideas? Answer: Typically, brainstorming sessions are targeted to a specific topic about which a group of people are instructed to come up with ideas. Each person shares ideas and reacts to the ideas of others with no criticism or analysis until the session is complete. Ideas are recorded as the session progresses so that they can be evaluated later. One way that brainstorming is used it to generate new ideas about potential solutions to common problems.

Describe how a focus group is set up and how it can be used to generate new business ideas? Answer: A focus group is a gathering of 5 to 10 people who are selected because they Copyright © 2015 Pearson Education, Inc.

xxi have some relationship to an issue being discussed. Focus groups generally work best as a follow-up to an initial brainstorming session, when the general premise for a business has been established. 8.

Explain how library and Internet research can be used to generate new business ideas? Answer: Libraries are often underutilized sources of information for generating business ideas. The best approach is to discuss your general area of interest with a reference librarian, who can point you to useful resources, such as industry specific magazines, trade journals, and industry reports.

Why is it necessary to quickly assess the merits of a business idea before conducting a feasibility analysis and writing a business plan? Answer: The time and resources necessary to complete a feasibility and full business plan should be reserved until the idea has passed a First Screen process. It forces founders to refine the business concept and work out potential kinks before progressing too far with a flawed plan.

10.

Describe the makeup and the purpose of the First Screen. Answer: The First Screen is a tool that contains 25 items for an entrepreneur to assess about a business idea. The process should take less than an hour and examines the business idea in terms of: strength of business idea, industry-related issues, market and customer-related issues, founder-related issues, and financial issues.

Application Questions 1.

Study the Web site of InstyMeds (www.instymeds.com), one of the startups mentioned in the chapter. Imagine you were part of InstyMeds’ founding team, and in meetings with investors it was your job to #1 describe the problem that InstyMeds had identified and #2 describe how the InstyMeds service solves the problem. Write out what you would have said to address points #1 and #2 above. Answer: The problem identified is that patients have poorer outcomes if they fail at medication compliance. One way to improve medication compliance is to improve filling of prescriptions. The InstyMeds service solves this problem by offering a convenient 24-hour medication dispenser similar to an ATM. This allows patients to more easily fill their prescriptions and adhere to their prescribed medical protocols. Student written statements will vary.

Calab Holms just finished reading this chapter and was struck by the idea of developing products to help older people remember to take their medicine on time. He has an idea for an iPhone app that will not only remind people to take their medicine on time, but will require the user to verify when the medicine has been taken and will send a text alert to a caregiver if the medicine isn’t being taken on time. Calab is ready to run with the idea, but Copyright © 2015 Pearson Education, Inc.

xxii first wants to make sure that it is consistent with changing economic trends, social trends, and technological advances. Make a table that lists these three environmental trends and the changes in these trends that work for and work against this idea. Answer: Student responses will vary but could include data regarding changing economic social and technological trends related to the increasing disposable income of senior citizens as boomers age, aging baby boomers having greater need for healthrelated services and the proliferation of smart phones/tablets and apps. 3.

Think about the problems that you encounter in your everyday life. Select one problem, and describe how solving the problem might represent the basis for a new business idea. Answer: Student responses will vary.

Identify three startups, other than those mentioned in the Chapter or included in Table 23, that were started to fill a gap in the marketplace. Identify the gap and how the startup is filling the gap in the marketplace. Answer: Student responses will vary.

Complete the First Screen for the business idea you selected to answer Question #3. Which areas of the First Screen were the easiest to complete and which areas were the most difficult? Was the result the one you expected? Answer: Student responses will vary.

Additional Activities 1.

Changing Environmental Trends

This exercise can either be conducted in your classroom or be assigned to students to do on their own. If you decide to make this an outside or homework assignment, you should at least discuss in the classroom:  The differences between trends and fads  A brief overview of the four kinds of environmental trends (economic, social, technological, and political/regulatory) Purpose: Your instructional goal is to encourage students to fill the board with amazing (and sometimes silly or ridiculous) products and services. This is a valuable exercise because many students do not consider themselves to be creative. When the exercise is completed, students are often surprised by the many innovative products and services that they generated. The products and services listed might also provide students with ideas for conducting feasibility studies or business plans. When done in the classroom, ask students to first close their textbooks, and then form discussion teams of four or five students. Ask each team to choose one of the trends: economic, social, technological, or political/regulatory. Copyright © 2015 Pearson Education, Inc.

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Next, review the rules of brainstorming. When done as an individual activity for homework, emphasize that it is not difficult for an individual to brainstorm, even by herself! Brainstorming rules typically include quantity over quality, no criticism of ideas is allowed, fast and furious is required, and piggybacking of ideas is encouraged. Each discussion team is now asked to use brainstorming to:  First, quickly generate a short list (3 to 5) of current facts related to their trend. For example, a social trend is baby boomers approaching retirement.  Then generate a long list (15 to 20) of new products or services inspired by these current facts. For example, if the team chose social trends, then the issues they identify during brainstorming might include the pending retirement of the baby boom generation, increasing numbers of Hispanics moving to the United States, and so forth. When each team is finished, ask them to write their list of new products or services on the board so everyone in the classroom can see. Ask a spokesperson from each team to discuss their list and identify the current facts that stimulated the products or services.

Unsolved Problems and Gaps in the Marketplace

This exercise can either be conducted in your classroom or be assigned to students to do on their own. If you decide to make this an outside or homework assignment, you should at least discuss in the classroom the differences between trends and fads. Purpose: Your instructional goal is encourage students to fill the board with amazing (and sometimes silly or ridiculous) products and services. This is a valuable exercise because many students do not consider themselves to be creative. When the exercise is completed, students are often surprised by the many innovative products and services that they generated. The products and services listed might also provide students with ideas for conducting First Screen analyses, feasibility studies, or business plans. When done in the classroom, ask students to first close their textbooks, and then form discussion pairs of two students. Next, review the rules of brainstorming. When done as an individual activity for homework, emphasize that it is not difficult for an individual to brainstorm, even by herself! Brainstorming rules typically include quantity over quality, no criticism of ideas is allowed, fast and furious is required, and piggybacking of ideas is encouraged. Ask each pair of students to use brainstorming to:  Identify a short list (2 to 3) of problems that they personally encountered within the last 24 hours. For example, parking, waking up, or a burned out light bulb. Or ask them to identify gaps in the marketplace they have noticed within the past month.  Quickly generate a list (5 to 10) of new products or services that could solve these problems or fill these gaps. For example, campus valet parking service, an alarm clock that runs away when you try to turn it off, or a light bulb that signals you three hours before it burns out.

xxiv When each pair is finished, ask them to write their list of new products or services on the board so everyone in the classroom can see. Ask a spokesperson from each pair to discuss their list and identify the problems or marketplace gaps that stimulated the products or services. Consider using both exercise one and two to really fill the board in your classroom! 3.

First Screen

Purpose: This exercise will reinforce for students the need to conduct research on a concept before advancing too fast to open a new business. Many students do not enjoy research, do not know the benefits of research, and/or do not know where to find information. Assign students to conduct a First Screen analysis of an idea for a new product or service. Students should use the First Screen template found in the Appendix of this chapter. Depending on your needs, you could require students to review specific sources (such as IBISWorld) or a specific number of sources. Appendix 2 of this chapter is particularly helpful in making this decision.

Brainstorming and Other Creative Stimulus Techniques

Purpose: This exercise is important because students often do not take the rules of brainstorming seriously, or they are unaware of other ways to stimulate creative thinking. Take students on a virtual tour to learn more about techniques that are useful in stimulating innovative business ideas. A quick Google and/or YouTube search on ―brainstorming‖ will provide millions of links. Two good ones include: http://www.jpb.com/creative/brainstorming.php http://www.youtube.com/watch?v=yAidvTKX6xM

Focus Groups

Purpose: This exercise is valuable to show that focus groups are relatively easy for students to conduct. In the corporate world, focus groups are typically closely controlled and monitored, but students can gain valuable information even from more casually conducted efforts. Take students on a virtual tour to learn more about conducting focus groups. A quick Google or YouTube search on ―focus groups‖ generates millions of links. A good one for students is http://www.managementhelp.org/grp_skll/focusgrp/focusgrp.htm as it provides how-to steps that they could easily use to conduct their own focus group.

If You Had only a $1,000 . . .

Purpose: This activity will demonstrate that it does not have to cost a lot of money to start a business, to practice brainstorming, and/or to help students get to know one another.

xxv Ask students, by a show of hands, ―Who can get your hands on a $1,000 or more within the next two weeks?‖ You can expect that a majority of your students will raise their hands. After describing the purpose of the activity, review the rules of brainstorming:  The goal is to generate a large quantity of new businesses concepts that could be started with very few resources. The goal is quantity, not quality.  No one can criticize anyone else’s ideas. Students should try to come up with what seem to be wild and crazy concepts. You want them to have fun as this stimulates creativity.  Piggybacking is strongly encouraged. This means that one team member should feel free to take another person’s ideas and change it slightly.  Fast and furious is better than slow and methodical. Provide a time limit of 10 to 15 minutes to pressure students to think fast without evaluating their concepts.  Appoint a scribe or note taker to jot down the group’s ideas. Ask students to form small discussion groups. The group’s assignment is to generate as many new business concepts as they can as quickly as they can. The team with the longest list is the winner. They are to assume that they have only $1,000, a computer and printer, a smart phone, and a working vehicle. (Do not tell them that this ―working vehicle‖ might be an airplane, a truck, a boat or ship, or a car.) You and they will be amazed at how many different kinds of businesses they identify!

Chapter 3 Feasibility Analysis Key Words Feasibility analysis—the process of determining if a business idea is viable Primary research—original research that is collected by the person or persons completing the analysis Secondary research—data this is already collected Concept test—involves showing a preliminary description of a product or service idea (concept statement) to industry experts and prospective customers to solicit their feedback Buying intention survey—an instrument that is used to gauge customer interest in a product or service Industry—a group of firms producing a similar product or service, such as fitness centers, smart phones, elderly home care, or online education Target market—the limited portion of the industry that a firm goes after or tries to appeal to

Chapter Overview This chapter focuses on assessing the feasibility of a business idea. A feasibility analysis is more stringent than the ―First Screen‖ (introduced in Chapter 2) and is designed to take the best idea or ideas that emerge and more fully assess their viability. This chapter includes a template for completing a feasibility analysis, including a description of each of the four steps. Copyright © 2015 Pearson Education, Inc.

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Chapter Summary 1. 2.

10.

Feasibility analysis is the process of determining if a business idea is viable. Primary research is original research that is collected by the person or persons completing the analysis. It normally includes talking to industry experts, obtaining feedback from prospective customers, and administering surveys. Secondary research probes data that is already collected. The data generally includes industry studies, Census Bureau data, company reports, and other pertinent information gleaned through library and Internet research. Product/service feasibility is an assessment of the overall appeal of the product or service being proposed. Its two components are product/service desirability and product/service demand. A concept test involves showing a preliminary description of a product or service idea, called a concept statement, to industry experts and prospective customers to solicit their feedback. A buying intentions survey is an instrument that is used to gauge customer interest in a product or service. It consists of a concept statement (or a similar description of a product or service) with a short survey attached. Industry/target market feasibility is an assessment of the overall appeal of the industry and market for the product or service being proposed. Its three components are industry attractiveness, target market attractiveness, and market timeliness. Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. Its two components are management prowess and (non-financial) resource sufficiency. Clusters of firms arise because they increase the productivity of the firms participating in them. Because the firms are located near one another, it is easy for the employees to network with one another, and it is easy for the firms to gain access to specialized suppliers, scientific knowledge, and technological expertise native to the area. Financial feasibility analysis is conducted to determine if a new venture is feasible from a financial perspective. Its three components are: total start-up cash needed, financial performance of similar businesses, and overall financial attractiveness of the proposed venture.

Chapter Outline I. II. III.

IV.

Introduction Template for Completing a Feasibility Analysis Product/Service Feasibility a. Product/Service Desirability i. Concept Test b. Product/Service Demand i. Buying Intentions Survey Industry/Target Market Feasibility Analysis a. Industry Attractiveness b. Target Market Attractiveness c. Market Timeliness Copyright © 2015 Pearson Education, Inc.

xxvii V.

VI.

Organizational Feasibility Analysis a. Management Prowess b. Resource Sufficiency Financial Feasibility a. Total Start-up Cash Needed b. Financial Performance of Similar Businesses c. Overall Financial Attractiveness of the Proposed Venture

Chapter Notes I.

Introduction  Feasibility analysis is the process of determining if a business idea is viable  The feasibility analysis step, along with the idea screening step, is investigative in nature and is designed to critically asses the merits of a business idea  The most compelling facts a company can include in a business plan are the results of its own feasibility analysis, especially feedback from industry experts and prospective customers

II.

Template for Completing a Feasibility Analysis  Template is shown in Table 3-1. A fuller version is provided in Appendix 3.1 at the end of the chapter  The four parts of feasibility analysis are product/service feasibility, industry/market feasibility, organizational feasibility, and financial feasibility  Completing a full feasibility analysis takes longer than a First Screen and should include both primary and secondary research

III.

Product/Service Feasibility  Product/service feasibility is an assessment of the overall appeal of the product or service being proposed a.

Product/Service Desirability  The first component of product/service feasibility is to affirm that the proposed product or service is desirable and serves a need in the marketplace  The proper mindset is to get a general sense of the answers to your product desirability questions rather than try to reach final conclusions i.



Concept Test A concept test involves showing a preliminary description of a product or service idea, called a concept statement, to industry experts and prospective customers to solicit their feedback A concept statement is normally a one-page document which includes the following: (1) description of product or service, (2) intended target market, (3) benefits of product or service, (4) description of how the product or service will be positioned relative to competitors, (5) description of how the product or service will be sold,

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 

b. 

Product/Service Demand The second component of the product/service feasibility analysis is to determine if there is demand for the product or service i.

IV.

and (6) a brief description of company’s management team Concept statement should be shown to 5 to 10 people who are familiar with the industry the firm hopes to enter Attached to the concept statement should be a survey that asks participants to (1) tell you three things they like about the product or service idea, (2) provide you three suggestions for making it better (tell you whether they think the product or service idea is feasible), and (3) share additional comments or suggestions

Buying Intentions Survey a. A buying intentions survey gauges customer interest in a product or service b. The buying intentions survey consists of a concept statement with a short survey attached c. The statement and survey should be distributed to 15 to 30 potential customers d. The statement and survey typically features a question that asks how likely the subject would be to buy the product or service

Industry/Target Market Feasibility Analysis  Industry/target market feasibility is an assessment of the overall appeal of the industry and the target market for the product or service being proposed  Most firms do not try to service their entire industry, only a specific target market within the industry  It’s important to assess both the broad industry and your specific target market a.

Industry Attractiveness i. In general, the most attractive industries for start-ups are large and growing, are young rather than old, are early rather than late in their life cycle, and are fragmented rather than concentrated ii. Some industries are characterized by such high barriers to entry, or the presence of one or two dominant players, that potential entrants are essentially shut out iii. You should also note the degree to which environmental and business trends are moving in favor of rather than against the industry

Target Market Attractiveness i. By focusing on a target market, a firm can usually avoid head-tohead competition with industry leaders, instead of serving a specialized market very well

xxix ii.

iii.

VI.

The challenge is to find a target market that’s large enough for the proposed business, yet is small enough to avoid attracting larger competitors Often, information from more than one industry and/or market must be collected and synthesized to make an informed judgment, especially if the firm is pioneering a unique area of the marketplace

Market Timeliness i. Determine if the window of opportunity for the product or service is open or closed ii. Study the simple economics of the industry to determine whether the timing is right for a new entrant iii. Firms that fail to conduct a thorough industry and target market analysis often find that the market is not large enough to maintain and grow the business

Organizational Feasibility Analysis  Organizational feasibility analysis determines whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business a.

Management Prowess i. A start-up should assess the prowess, or ability, of its initial management team ii. Individuals starting the firm should conduct honest and candid self-assessments iii. Two of the most important factors are passion for the business and understanding of the markets in which the firm will compete iv. Additional factors that define management prowess include prior entrepreneurial experience, depth of professional and social networks, degree of creativity, experience in cash flow management, and whether the team has college degrees

Resource Sufficiency i. The focus in organizational analysis is on non-financial resources because financial feasibility is considered separately ii. Identify the 8 to 12 most important and potentially problematic non-financial resources and assess whether they are available iii. Examples of non-financial resources include office space, manufacturing space, key management employees, key support personnel, and support from state and local governments if applicable iv. One easily overlooked resource sufficiency issue that should be considered is proximity to similar firms, creating a cluster that can increase productivity of the participating firms

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The most important issues to consider at this stage are total start-up cash needed, financial performance of similar businesses, and overall financial attractiveness of the proposed venture More complete financial projections will be included in the business plan a.

Total Start-up Cash Needed i. Try to determine total cash needed to prepare the business to make its first sale ii. A detailed explanation of where the money will come from should be provided iii. If money will come from friends, credit cards, or a home equity line of credit, a reasonable plan should be stipulated to repay the money iv. When projecting start-up expenses, it is better to overestimate rather than underestimate the costs involved

Financial Performance of Similar Businesses i. Estimate a proposed start-up’s potential financial performance by comparing it to similar, already established businesses ii. Utilize archival data available online, including financial reports on firms iii. Some industry trade associations publish data on the sales and profitability of firms in their industries iv. Basic Internet searches are also helpful v.

Simple observation and leg work can also be used to gauge the type of sales to expect by estimating the number of customers and average purchase amount at various times of day

Overall Financial Attractiveness of the Proposed Venture i. The extent to which a proposed business appears positive relative to each factor is based on an estimate or forecast, not actual performance ii. Important factors include the extent to which sales can be expected to grow during the first few years of the venture, percentage of recurring revenue to anticipate, the likelihood that internally generated funds will be available within two years, and the availability of exit opportunities for investors if applicable

Review Questions 1.

What is a feasibility analysis? How does a feasibility analysis differ from a business plan? Answer: A feasibility analysis is the process of determining if a business idea is viable. The feasibility analysis step, along with the idea screening step, is investigative in nature and is designed to critically asses the merits of a business idea before producing a business plan. Copyright © 2015 Pearson Education, Inc.

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What are the four individual components of a full feasibility analysis? Answer: Product/service feasibility, industry/target market feasibility, organizational feasibility, and financial feasibility.

What is the difference between primary research and secondary research? Are both types of research necessary to complete a full feasibility analysis? Answer: Primary research is collected by the individual conducting the analysis, whereas secondary research probes data that has already been collected. Both types of research are needed for a complete feasibility analysis.

Describe the purpose of product/service feasibility analysis? Briefly describe its two components. Answer: Product/service feasibility analysis is an assessment of the overall appeal of the product or service being proposed. Its two components are product/service desirability and product/service demand.

Describe the purpose of a concept test and how it should be executed. Also, describe the purpose of a buying intentions survey and how it should be distributed and assessed. Answer: A concept test involves showing a preliminary description of a product or service idea, called a concept statement, to industry experts and prospective customers to solicit their feedback. A buying intention survey is used to gauge customer interest in a product or service. About 25 to 50 potential customers are given a concept statement with a short survey attached. Typically the number of people who indicate that they definitely would buy is combined with the number of people who indicate that they probably would buy to gauge customer interest.

Explain the purpose of industry/target market feasibility analysis. Briefly describe its three components? Answer: Industry/target market feasibility is an assessment of the overall appeal of the industry and market for the product or service being proposed. Its three components are industry attractiveness, target market attractiveness, and market timeliness.

What is a target market? Why do most start-ups start in target markets rather than broader markets that have more customers? Answer: A target market represents the limited portion of the industry that a firm goes after or tries to appeal to. Start-ups rarely have the resources to successfully serve the entire industry, so they appeal to a select portion of the total industry that is not being targeted by the larger, more established firms.

Describe the purpose of organizational feasibility analysis. Briefly describe its two components.

xxxii Answer: Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. Its two components are management prowess and (non-financial) resource sufficiency. 9.

What is an industry ―cluster‖? Why might a semiconductor start-up, for example, decide to launch in a geographic area where there are other semiconductor firms, rather than another area? Answer: Clusters of firms arise because of the increase of productivity of the firms participating in them. It is easier for the employees of these firms to network with one another and for the firms to gain access to specialized suppliers, scientific knowledge, and technological expertise native to the area.

10.

Describe the purpose of a financial feasibility analysis. Briefly describe its three components. Answer: Financial feasibility is conducted to determine if a new venture is feasible from a financial perspective. Its three components are total start-up cash needed, financial performance of similar businesses, and overall financial attractiveness of the proposed venture.

Application Questions 1.

Kendall Ryan just applied for a bank loan to finance a Greek-style restaurant he plans to open near a large Midwestern university campus. The banker asked Kendall if he conducted any primary research to assess the feasibility of the restaurant. Kendall replied that he spent countless evenings and weekends in the library and on the Internet collecting data on the feasibility of Greek-style restaurants, and he is confident that his restaurant will be successful. He said that he even did careful research to make sure that Greek-style restaurants do well near large Midwestern university campuses. If you were the banker, how would you react to Kendall’s statements? Answer: Kendall should also collect some primary research. Kendall could conduct a concept test to see if the idea is appealing to 5-10 restaurant industry experts and 5-10 potential customers. He could also distribute a buying intentions survey to 25-50 potential customers on the campus to gauge customer interest.

Three recent startups, CareZone, BenchPrep, and CitySlips were mentioned in Chapter 2. Pick one of these companies and write a concept statement for it. Answer: Student responses will vary but should include a preliminary description of the product/service idea, the intended target market, the benefits of the product/service, a description of how the product/service will be positioned relative to competitors, a description of how the product/service will be sold, and a brief description of the company’s management team.

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InstyMeds, another company introduced in Chapter 2, developed a vending machine for prescription drugs to be located in rural hospitals and urgent care centers. Describe how you would have conducted an industry/target market feasibility analysis for this startup. Answer: Student responses will vary but should include some analysis of the trends in fitness, specifically yoga as well as trends in exercise equipment in general. They should consider whether industry is large and growing, is young rather than old, is early rather than late in its life cycle, and is fragmented rather than concentrated. They should also note the degree to which environmental and business trends are moving in favor rather than against the industry.

Jane Robinson has developed a software product that helps elementary school teachers better prepare their lesson plans and more accurately assess their students’ progress. Jane is now wondering whether this is a good time to launch the product. What factors should Jane consider in making this determination? Answer: Jane should consider whether the window of opportunity is open or closed. Are economic factors affecting public schools placing this industry on a growth trend? She should also try to determine if there are a number of competing lesson plan and assessment resources in this market. If so, the trends may indicate that this is not a good time to launch a business in this industry.

Using one or more of the resources included in the Internet Resources Table in Appendix 2.2 at the end of Chapter 2, investigate the health and growth potential of the spa industry in the United States. Answer: Student responses will vary.

Additional Activities 5. Concept Statement and Buying Intentions Survey Purpose: students will learn to consolidate their new business concept into a one-page document and will learn how to approach other people to obtain feedback on their concepts. This could be done either as an individual or team assignment. It is not necessary for them to have conducted a feasibility analysis before this assignment. Ask students to identify one new business concept that they believe could be successful, write a one-page concept statement, and then script at least five questions to include in a buying intentions survey. You could either review these documents yourself or have students critique one another’s work. Copyright © 2015 Pearson Education, Inc.

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Then assign the students to share their concept statements and conduct their buying intentions survey with some minimum number of people; a minimum of 5 people is recommended. Give them one week to complete this assignment. When the deadline is up, have students verbally report their results to the class.

6. Industry Attractiveness—the Best and the Worst Purpose: to identify industries that are highly attractive or unattractive. Use this activity after you have finished lecturing on Industry Attractiveness. 

Ask students to call out loud the best and worst examples of industries. For instance, what are really bad industries to enter or what are examples of really attractive industries to enter. Write the two lists on chalk- or whiteboard.



For each item on each list ask students to share their reasons for placing that industry on their list.



After discussing each industry, have students work in discussion groups to answer the following discussion questions.



Have each discussion group report their answers to the total group and discuss.

The Best and the Worst Discussion Questions: 

Prioritize the list of the top ―Do Enter Industries‖ based on our discussion of the ―Best‖ list. In other words, this would be the first industry I would want to enter, then the second industry I would want to enter, and so on. Be prepared to defend your choices.



Prioritize the list of the ―Do Not Enter‖ industries based on your discussion of the ―Worst‖ list. Be prepared to defend your choices.

Organizational Feasibility Analysis

Purpose: to encourage students to expand their awareness of the various factors included in an organizational feasibility test, and to encourage more ideas, adaptations, and innovations. Use this discussion activity after you have completed your lecture on organizational feasibility analysis. Provide your students the ―Who, What, Where, When, Why, and How‖ questions following. Give them a few minutes to read through the questions, and then call their attention to the first set of questions, ―Who.‖ Ask them to answer with examples related to the feasibility of their new business concept or about their industry. Once each student or group has answered each question, ask them to create additional questions that need to be asked and answered. Then continue on to Copyright © 2015 Pearson Education, Inc.

xxxv the second point, ―What,‖ and repeat the discussion, eliciting 4 to 5 responses of examples and additional questions. Proceed through the remaining questions, allowing ample time for students’ examples and questions. 1. WHO Who can help or make contributions to make our business successful? Who must I ―sell‖ on this idea in order for it to become a reality? Who can help me get the additional resources needed to open our doors for business? Who will benefit from the success of our business? 2. WHAT What do I need by way of additional resources that I haven’t considered yet? What techniques or methods can I use to get these resources? What is the best way to get these resources for my business? What is the first step that we must take to obtain resources? What will make them (vendors, lenders, customers, other stakeholders) ―buy‖?

3. WHERE Where should I start to obtain what I need? What resistance is likely to be encountered as we attempt to obtain these organizational resources? Where should I ―plant seeds‖ for the resources I will need in the future?

4. WHEN When should I introduce the plan to each category of stakeholder? When should we implement the various tasks needed to create our organization? When should we revise our current organizational strategy? 5. WHY Why should a stakeholder buy our idea? Why is our way better? Why is the resistance against our new business concept so strong? 6. HOW How can we improve on our concept? How can we ―test the waters‖ without losing our shirts? How can I persuade centers of influence and important stakeholders? When all students have completed this discussion, ask these questions to debrief the activity: 1.

How can these questions help you in problem solving and innovation?

Which set of questions do you find yourself using most often?

Which question is the most thought-provoking?

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Chapter 4 Introductory Material, Executive Summary, and Description of the Business Key Words Business plan—a written document (usually 25 to 35 pages) that carefully explains every aspect of a new business venture Cover page—includes the name of the company, its street address, its e-mail address, its phone number (land based and cell), the date, the contact information for the lead entrepreneur, and the company’s Web site address, Facebook page and Twitter account if it has one Table of contents—follows the cover page and lists the main sections, subsections, and appendices to the plan along with their corresponding page numbers Executive summary—a short (should not exceed two single-spaced pages) overview of the entire plan provides a busy reader with everything that should be known about the venture’s distinctive nature Mission statement—defines why a company exists and what it aspires to become Position—how a product or service is situated relative to its rivals Founder’s agreement—(also called a shareholders’ agreement) a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the ―sweat equity,‖ they put into the firm, and how long the founders will have to remain with the firm for their shares to be vested Brand—the unique set of attributes that allow consumers to separate it from its competitors

Chapter Overview This chapter begins Part III of the text, Preparing a Business Plan. Chapters 4 through 10 will walk the reader through the preparation of each component of the business plan. This chapter focuses on the executive summary and company description, along with the cover page and table of contents.

Chapter Summary 1.

3. 4.

The executive summary and the company description are arguably the most important sections of a business plan because if the reader’s interest isn’t captured early on the plan is unlikely to get read. The cover page should include the name of the company, its street address, its e-mail address, its phone number (land based and cell), the date, the contact information for the lead entrepreneur, and the company’s website address if it has one. The table of contents should follow the cover page, and should list the main sections, subsections, and appendices to the plan along with their corresponding page numbers. The executive summary is the first item that appears in a business plan. It is a short Copyright © 2015 Pearson Education, Inc.

xxxvii overview of the entire plan and provides a busy reader with everything that needs to be known about the new venture’s distinctive nature. The most important thing to remember when writing an executive summary is that it’s not an introduction or a preface to the business plan. Instead, it is meant to be a summary of the plan itself. Even though the executive summary appears at the beginning of the business plan, it should be written last. The plan itself will evolve as it’s written, so not everything is known at the outset. The main body of the business plan begins with a general description of the company. While at first glance this section may seem less critical than others, it is extremely important. It demonstrates to your reader that you know how to translate an idea into a business. The subsections under company description category are: company history, mission statement, products and services, current status, and legal status and ownership. It is best to follow this order. A mission statement defines why a company exists and what it aspires to become. The primary consideration in naming a business is that the name should complement the type of business the company plans to be.

9. 10.

Chapter Outline I. II.

III.

IV.

Introduction Cover Page and Table of Contents a. Cover Page b. Table of Contents Executive Summary a. Format b. Content Company Description a. Company History b. Mission Statement c. Products and Services d. Current Status e. Legal Status and Ownership Selecting the Name for a Business a. Primary Consideration in Naming a Business i. Customer-Driven Companies ii. Product- or Service-Driven Companies iii. Industry-Driven Companies iv. Personality- or Image-Driven Companies b. Legal Issues

Chapter Notes I.

Introduction  A business plan is a written document (usually 25 to 35 pages) that carefully explains every aspect of a new business venture  The business plan describes why the business is starting and how it will make money  Experts vary on the order of the topics in a business plan, but most follow a fairly standard format Copyright © 2015 Pearson Education, Inc.

xxxviii   

The first two steps in a business plan, the executive summary and the company description, will be discussed in this chapter along with the cover page and executive summary The executive summary and company description are arguably the most important sections of a business plan because they must capture the readers’ interest if the entire plan is to be read Business plans should be written with extreme empathy for the reader; make them clear, concise, easy to follow, and interesting

II.

Cover Page and Table of Contents a.

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  

II.

  

 

Cover Page Includes key information pertaining to the new venture centered at the top of the page: o Name of the company o Street address of the company o E-mail address o Phone number (land based and cell) o The date o Contact information for the lead entrepreneur o Company’s website address if it has one A confidentiality notice should be placed on the bottom of the page Company logo (if already developed) should be placed near the center of the page A sharp-looking photo or sketch of the product or service, or an appropriate stock photo image, can be included to make the plan more visually appealing and professional in appearance Table of Contents The table of contents follows the cover page The table of contents lists the main sections, subsections, and appendices to the plan along with the corresponding page numbers

Executive Summary The executive summary is a short overview of the entire plan, and is the first item that appears in the business plan In many instances, an investor will first ask for an executive summary and will only request a full business plan if the executive summary is convincing Rather than serving as an introduction to the plan, the executive summary is intended to be a summary that provides readers with a good sense of the entirety of the plan itself a.

Format  The executive summary should not exceed two single-spaced pages  The cleanest format follows the structure and order of the plan on a section-by-section basis  There should be two versions of the executive summary: o One summary that is part of the business plan Copyright © 2015 Pearson Education, Inc.

xxxix o  

III.

 

One summary that is a standalone document for individuals who want to review an executive summary before deciding whether to request the full business plan Some investors ask for a short PowerPoint (10 to 15 slides) overview rather than a traditional executive summary Entrepreneurs should write the executive summary last to make sure it accurately reflects the entirety of the business plan

Content  Each section of the executive summary contains a synopsis of the same section in the broader business plan  It’s important that the first section of the executive summary, covering the company description, begins by describing the opportunity and shows how the proposed business meets the opportunity  Most experts recommend that the executive summary state the amount of funds being requested and the amount of equity the business is willing to surrender (in a section called ―Status and Offering‖) if the summary is being shown to investors

Company Description The company description should start with a brief introduction that provides an overview of the company and reminds the reader of the reason it is starting There are two major points to be mindful of as you start writing this section: o A business plan is a story about an opportunity and how a business will take advantage of the opportunity o You must establish credibility by using facts and providing proof of research a.

  

    

Company History This section should explain where the idea for the company came from If the company has been in existence for a while, provide a brief timeline in narrative form and talk about its major achievements You should also talk about the history of revenues, net income, and sales growth Mission Statement The mission statement defines why a company exists and what it aspires to become Written carefully, it can define the path a company takes and act as a financial and moral compass Articulate the mission or purpose of the company in as few words as possible Some companies also have mottos or taglines; these should be mentioned in this section of the plan There is no set procedure for how to come up with a mission statement or tagline; founders often get together and simply brainstorm ideas



    

 

   

Products and Services The products and services section should explain your product or service, including a description of how it is unique and how you plan to position it in the marketplace Discuss how your company differs from others in terms of the products it offers, its location, and its price range Identify who your clientele will be and why they would patronize your business instead of others This is the ideal place to report results of your feasibility analysis Explain any proprietary aspects to your product or service or explain how you will create barriers to entry If you fail to candidly address difficult issues, such as creating barriers to entry, you will lose credibility

Current Status This section reveals what major milestones in development your company has already reached Three issues are particularly important to address: o The current composition of your management team  If you are an early-stage venture, you should mention future staffing plans o Early customer reaction to your product or service  Summarize any results of feasibility analyses and indicate how close your product is to being market-ready o The financial status of your company  How has the company been funded?  Do you have any debt, or have you surrendered company equity?  Clearly state how much funding you are seeking and for what purpose Legal Status and Ownership This section should indicate who owns the business and how ownership is split up Describe the founders’ agreement, outlining how ownership is to be shared among founders, if one has been established If you have multiple founders and no founders’ agreement, indicate that this step is pending to maintain credibility with your readers Indicate your current form of business ownership

xli o o o o

  

You are a sole proprietorship or general partnership if you have not yet incorporated or created any other type of business entity Better options for the long term include a subchapter S corporation, a C corporation, or a limited liability company (LLC) You will need to retain an attorney to help you resolve this matter If you have not determined the type of business ownership, indicate this step as pending so that you maintain credibility with your reader

Selecting the Name for a Business Selecting the name for your business is not a part of the formal business planning process, but it’s an important activity A company’s name is normally the first thing that people associate with a business, and it can be an integral part of the company’s branding strategy The brand is a unique set of attributes that allow consumers to separate it from its competitors; you want a name that will facilitate rather than hinder the differentiation strategy a.

Primary Consideration in Naming a Business  The company name should complement the type of business the company plans to be  There are four categories to discuss when considering this issue: i.

ii.

iii.

iv.

Customer-Driven Companies  If a company plans to focus on a particular type of customer, its name should reflect the attributes of its clientele (e.g., Big and Tall Guys or ParentWatch) 



Product- or Service-Driven Companies If a company focuses on a particular product or service, the name should reflect the advantages that its product or service provide (e.g., 1-800FLOWERS, XM Satellite Radio, Whole Foods Markets, and Jiffy Print) Industry-Driven Companies If a company plans to focus on a broad range of products or services in a particular industry, its name should reflect the category it is participating in (e.g., General Motors, Linens N Things, Home Depot) Personality- or Image-Driven Companies

xlii 

Some companies are founded by individuals who place an indelible stamp on the company. In this case, it may be smart to name the company after its founder (e.g., Ben & Jerry’s Homemade, Liz Claiborne, Magic Johnson Enterprises)

Legal Issues  The general rule for business names is that they must be unique  To determine whether a name is available in a particular state, the entrepreneur must contact the secretary of state’s office  Instructions for how to go about obtaining a trademark on a name and a logo are available at the USPTO website  The process for finding a name for a business can be frustrating because the most obvious names are often already taken  A complicating factor is getting an Internet domain name that is the same as the company’s name  A brief mention should be made in the business plan that a company’s name has been registered and trademarked, and that the Internet domain name has been secured  If these activities have not been completed, mention this step as pending so that you maintain credibility with the reader

Review Questions 1.

Why is it important for a business plan to have a cover page? What information should the cover page contain? Answer: The cover page makes the first impression for your business plan. The cover page should include the name of the company, its street address, its e-mail address, its phone number (land based and cell), the date, the contact information for the lead entrepreneur, and the company’s Web site address, Facebook page, and Twitter account if it has one.

What is it important for a business plan to have a table of contents? What are the attributes of an effective table of contents? Answer: The table of contents makes it easy to find anything in the plan. It should list the main sections, subsections, and appendices to the plan along with their corresponding page numbers.

What is an executive summary? Why is it often called the most important part of a business plan? Answer: The executive summary is the first item that appears in a business plan. It is a short overview (no more than two single-spaced pages) of the entire plan, and it provides a busy reader with everything that needs to be known about the new venture’s distinctive nature. The executive summary is arguably the most important part of the plan because many investors will ask to review an executive summary before deciding Copyright © 2015 Pearson Education, Inc.

xliii whether to request a full business plan. 4.

At what point in the process of putting together a business plan should the executive summary be written? Answer: The executive summary should be written last. The plan itself will evolve as it’s written, so not everything is known at the outset.

Why would an investor ask for a PowerPoint overview of a business plan rather than an executive summary or the full plan? Answer: Some investors ask for a short PowerPoint (10 to 15 slides) overview rather than a traditional executive summary because it is quicker for a busy potential investor to click through a few slides than to read the executive summary.

Explain the statement ―The primary goal of an executive summary is to capture the reader’s attention‖? Answer: The executive summary, along with the company description, must capture the reader’s attention because if the reader’s interest isn’t captured early on, the plan itself is unlikely to get read. Also, if the executive summary was requested as a standalone document, the rest of the plan won’t be seen unless the executive summary succeeds in capturing the reader’s interest.

What are the subsections that are included under the company description section of a business plan? Answer: The subsections under the company description category are: company history, mission statement, products and services, current status, and legal status and ownership. It is best to follow this order.

What is the purpose of a mission statement? Why is it important to include a mission statement in a business plan? Answer: A mission statement defines why a company exists and what it aspires to become. In the business plan, it shows that your business is focused and that you can articulate its purpose clearly.

To what extent should the results of a company’s feasibility analysis be reported in its business plan? Answer: The product/service description section is the ideal place to report any meaningful results from your feasibility analysis. Sharing these results gives the reader some insight into how you shaped your business ideas based on actionable feedback.

10.

Why is selecting a company’s name a critical issue? Answer: A company’s name is normally the first thing that people associate with a business, and it can be an integral part of the company’s branding strategy.

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Application Questions 1.

Sarah Austin, who has worked with disabled children all of her professional career, is in the final stretch of developing an iPhone app that will help parents with disabled children better cope with their disabilities. She has put a considerable amount of time and effort into the project, and believes the app can make a meaningful difference in the lives of those people who use it. Sarah has a dilemma. She had planned to spend the next three weeks completing a feasibility analysis and incorporate the results of the feasibility analysis into her business plan, which she thinks will take an additional two weeks. An alternative is to move forward with the business plan and complete the feasibility analysis later. Sarah has heard that several competing apps are in various stages of development, and fears that if she doesn’t get her business plan completed quickly and out for review she may get beat to the punch. What would you tell Sarah if she asked you for your advice? Answer: The ―Products and Services‖ section is the ideal place for founders to start reporting the results of feasibility analysis. Sarah is right to be concerned that she does not have this data collected, but she should not duck the issue. Rather, she should address the issue head on and focus on the advantages to her product idea. Sarah can focus on her personal story of experience working with disabled children to help capture the interest of investors in the absence of a completed feasibility analysis. If she has first screen data, that should be included at this point. The fact that there are other companies pursuing development of competing apps should raise the question of barrier to entry in this industry and must be addressed in the plan as well. If the window of opportunity is closing, revisions to the business idea may be required.

Write a mission statement for ZUCA (www.zuca.com), the backpack (and suitcase) on wheels company mentioned in several chapters of this book. How can this statement help define the path that ZUCA takes and act as the company’s financial and moral compass? Answer: Student responses will vary.

Suppose you have been asked by your local newspaper to write a 400-word article about the importance of writing a business plan and how to start the process. Please write a 400-word article about the importance of writing a business plan and how to begin the process. Answer: Student responses will vary.

Scott and Rebecca Wheeler’s youngest daughter, Emily, has struggled with asthma since she was born. In caring for Emily over the years, Rebecca designed and made a variety of cards, posters, notes, and even decorated lunch bags that encouraged Emily, educated her about her condition, and reminded her to take her medicine on time. Scott and Rebecca are in a support group for parents with asthmatic children, and many of the parents have encouraged Rebecca to start a company to make the items she made for Emily available to other parents. Rebecca has decided to go for it and is writing a Copyright © 2015 Pearson Education, Inc.

xlv business plan for the company. One thing she’s unsure about is how much of her personal story to include in the plan. Should she talk about how she developed the items for her own daughter, Emily, or should she stick to the facts? If Rebecca asked you for your advice, what would you tell her? Answer: If you have an interesting personal story about how your product or business was created, you should share it in the business plan. This helps to put a human face on the plan and make it more interesting and relatable to the reader. 5.

Suggest an alternative name for the fictitious fitness club, Prime Adult Fitness, discussed in the chapter. The Internet domain name must be available for the alternative name that you suggest. Explain the rationale for the name you choose. Answer: Student responses will vary.

Additional Activities 1.

Draft a Mission Statement

Purpose: students will practice writing a mission statement. After lecturing on mission statements, show students the actual mission statements of some successful businesses. Ask them what characteristics they notice about the mission statements. Hopefully, they will notice the typical length, key words that convey emotion, and perhaps even that many mission statements are used mainly for public relations purposes. Although students can either do this activity individually or in groups, their creativity is more likely to be stimulated by collaborating with group members. If students work in groups, then ask them to collaborate on all of the statements (not divide the statements up among them) and appoint a scribe to record their work. Have them begin the process of writing a mission statement by filling in the blanks to these statements: The number one reason we (I) decided to start this business is because _____. When people in the community think of this business, I (we) want them to say, ―_____.‖ We (I) hope that our business impacts our customers’ lives by _____. Our (my) three most important personal values include _____. We (I) hope that this business impacts our employees’ lives by _____. The number one reason this business is different from our competitors is because _____. Suppliers and vendors will want to do business with us (me) because _____. The number one reason the products/services that we (I) sell will satisfy our (my) customers because _____.

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Name This Company

Purpose: to practice developing a memorable business name. Items needed—miscellaneous items, such as paper clips, golf balls, spoons, and so on. Have enough items to provide one item either for each student or for each group of students. You can brighten this activity if you collect some unusual items for this activity, as students learn more when they are enjoying themselves! After lecturing on selecting a name for a business that will meet the company’s need for branding, provide students (or teams) with one item. Ask students to use the brainstorming process identified in Chapter 2, and ask teams to appoint a scribe to record their ideas. Give students a limited amount of time, such as 10 to 15 minutes. Their task is to use the concepts in this chapter to develop a business name that will serve as an effective brand. For example, the company names they develop should reflect the four categories: customer-driven, product- or service-driven, industry-driven, and personality- or image-driven. When everyone is finished or time is up, ask the scribes to share the company names, and identify which of the four categories they based their company name on.

Tagline, Slogan, Motto

Purpose: students will practice writing a slogan. After lecturing on slogans and taglines, show students some actual company slogans or mottos of some successful businesses. Ask them what characteristics they notice about the taglines. Hopefully, they will notice the typical length and key words that convey emotion. While students can either do this activity individually or in groups, their creativity is more likely to be stimulated by collaborating with group members. If students work in groups, ask them to collaborate on this activity and appoint a scribe to record their work.

Chapter 5 Industry Analysis Key Words Industry—a group of firms producing a similar product or service, such as airplanes, music, electronic games, or fitness club memberships Target market—the limited portion of an industry that a firm goes after or tries to appeal to at a certain point in time NAICS Code—(replaced the older SIC system in 1997) a two- through six-digit hierarchical classification code system that identifies the industry that a company operates in (e.g. 713950 for the fitness center industry) Industry structure—how concentrated or fragmented the industry is and whether the industry’s competitive landscape is in general attractive or unattractive Copyright © 2015 Pearson Education, Inc.

xlvii Concentrated vs. fragmented industries—a concentrated industry is dominated by a few large firms, whereas a fragmented industry includes a large number of smaller companies Bifurcated industries—industries where most successful companies serve either the top end of the market (in terms of quality of goods and price range) or the bottom end, and companies would struggle to be successful trying to serve the middle.

Chapter Overview This chapter introduces and describes the industry analysis portion of the business plan. It’s important that this section focus strictly on a firm’s industry rather than its industry and its target market simultaneously.

Chapter Summary 1. 2.

10.

An industry is a group of firms producing a similar product or service, such as airplanes, music, electronic games, or fitness club memberships. The reason it’s important to separate the analysis of a firm’s industry and its target market is that it’s premature for a new firm to select, or even talk about, a specific target market until an understanding of the broader industry is obtained. It’s important that the industry analysis appear early in a business plan, because it logically precedes the analysis of a firm’s target market and its marketing strategy. It also helps set up and support the remainder of the plan. The major sections of an industry analysis include: industry definition, industry size, growth, and sales projections; industry characteristics; industry trends; and long-term prospects. If your firm operates in two or more industries, you should identify all the industries that it participates in and recognize that it will be necessary to conduct an industry analysis for each of the industries. Some discretion is allowed regarding the weight placed on the individual analyses. In some instances, when a firm operates in more than one industry, it may be appropriate to conduct a full analysis on the primary industry that firm operates in and an abbreviated analysis on the other. The key to the industry size, growth, and sales projections portion of the analysis is to not just report the numbers. The key is to make sense of the numbers and present them in a way that builds the credibility of your business plan. The four key issues to deal with in the industry characteristics section of the analysis are industry structure, the nature of the participants in an industry, key ratios, and the industry’s key success factors. The topic of industry structure is particularly important. An industry’s size and its growth rate, regardless of how positive they are, are basically moot points if an industry isn’t structurally attractive for a start-up. The industry trends portion of an industry analysis is arguably the most important section because it often lays the foundation for a new business idea in an industry, and it typically provides the justification for claims made earlier in the industry analysis. The industry analysis should conclude with a brief statement of your beliefs regarding the long-term prospects for the industry.

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Chapter Outline VI. VII. VIII.

IX.

XI. XII.

Introduction Industry Definition Industry Size, Growth Rate, and Sales Projections a. Industry Size b. Industry Growth Rate c. Industry Sales Projections Industry Characteristics a. Industry Structure b. Nature of Participants c. Ratios d. Key Success Factors Industry Trends a. Environmental Trends b. Business Trends Long-term Prospects How the Industry Analysis Affects and Is Affected by Other Sections of the Plan

Chapter Notes I.

Introduction  An industry is a group of firms producing a similar product or service  Industries vary along many dimensions, including size, growth rate, structure, financial characteristics, and overall attractiveness  The trends affecting an industry also matter  It is important that the industry analysis section of your business plan focus strictly on the firm’s industry rather than the industry and the target market simultaneously o A target market is the limited portion of an industry that a firm goes after or tries to appeal to at a certain point in time  It’s premature for a new firm to discuss a specific target market until an understanding of the broader industry is obtained  The industry analysis should appear early in the business plan because it logically precedes the analysis of a firm’s target market and marketing strategy

II.

Industry Definition  Briefly (no more than several sentences) describe the firm’s industry: o The industry’s SIC code and NAICS code should be provided  A firm’s industry can be defined narrowly or broadly (e.g., JetBlue can be defined as in the airline industry or in the transportation industry)  The definition determines the scope of the firm’s overall sphere of concern  If your firm operates in two or more industries, you should identify all the industries that it participates in  It may be difficult to identify an industry that matches an innovative new product or service Copyright © 2015 Pearson Education, Inc.

xlix o o o

III.

In the case of an innovative product or service, improvise by selecting industries that represent the closest fit, and then include additional pertinent information The advantage of this approach is that your analysis is anchored in established NAICS categories, which provide you with plentiful information If you create a new definition that is more precise, it may be more difficult to accumulate good-quality information for your industry analysis

Industry Size, Growth Rate, and Sales Projections  This section discusses the size (in dollars), the growth rate (in percent), and the future sales projections for the industry or industries our firm will be entering  The key is to make sense of the numbers and present them in a way that builds the credibility of your business plan  There are four general rules of thumb for completing this section: o Always display financial information, such as industry sales and growth rate, in a multiyear format, making it easy to spot trends o Display your information graphically if possible o Provide information about your industry on a regional or local basis if appropriate o Avoid the temptation to report only positive or flattering information about your industry a.

Industry Size o Industry size is normally displayed in dollars over a three- to five-year period o The ideal size for a start-up is large enough to allow different competitors to serve different segments profitably but small enough that it isn’t attracting the immediate attention of larger potential competitors o If your industry is broken down into easily identifiable segments, it may be appropriate to report the share (in percentage) of each segment o Some plans also report the contribution that a specific industry makes to its larger industry sector

Industry Growth Rate o An industry’s growth rate should be reported on a percentage basis along with an interpretation of what the numbers mean o Some plans comment on how the industry growth rate compares to similar industries o If you are defining an industry that isn’t being actively tracked by a reliable source, finding good sales data will require creativity and persistence

l o o

IV.

You can quote from established sources, but do so sparingly; readers will want to know how you have interpreted the data Include concrete numbers for what you think your industry’s sales and sales growth rate will be for the next one to three years

Industry Characteristics  This section talks about the structure of your industry and lays out its competitive landscape  The four key issues to deal with are: industry structure, the nature of the participants in an industry, key ratios, and the industry’s key success factors a.

Industry Structure o Industry structure refers to how concentrated or fragmented the industry is and whether the industry’s competitive landscape is generally attractive or unattractive o Report on how concentrated or fragmented your industry is  Concentrated industries are dominated by a few large firms  Fragmented industries include a large number of smaller companies  Normally, an industry is concentrated if large capital investments are required to participate, or if it has matured and consolidation has taken place  An industry is typically fragmented if it’s in the emergence stage of its life cycle and/or the cost of entry is relatively low  Most firms launch into a fragmented industry; no explanation need be made about this approach  If you plan to launch into a concentrated industry, you will need to explain how you plan to compete  Some firms compete in concentrated industries by identifying a niche that is less expensive to compete in, or by using innovation to lower the cost to enter the industry o You will also need to report on the general attractiveness of an industry’s competitive landscape o Attractiveness can be evaluated using Michael Porter’s ―five forces‖ model:  Relatively high barriers of entry to keep out competition  Not enough rivalry to create cutthroat competition  No good substitutes for the basic product or service  Limited power of suppliers to negotiate input prices up Copyright © 2015 Pearson Education, Inc.

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Limited power of buyers to force selling prices down o Comment on the most salient of the ―five forces‖ in your business plan

Nature of Participants o In this brief section, you will provide your reader with a ―feel‖ for the nature and mixture of firms in your industry o You want your reader to visualize how your firm will fit in or see the gap that your firm will fill o You should also discuss how the industry is segmented o If you know which segment is growing the fastest and/or is the most profitable, that’s good information to convey o Some industries have clearly bifurcated, with the most successful companies serving either the top end of the market or the bottom end o The worst place to be, in bifurcated industries, is right in the middle

Ratios o Report an industry’s key financial ratios and other ratios of interest o This information provides a point of reference to compare a company’s financial and non-financial projections against

Key Success Factors o Key success factors define what an organization in the industry has to be good at to be successful o Most industries have 6 to 10 key factors o Most successful firms are competent in all their industry’s key factors and differentiate themselves by excelling in two or three areas

Industry Trends  This is arguably the most important section of an industry analysis because it often lays the foundation for a new business idea in an industry  The two types of trends that are the most important to focus on are environmental trends and business trends a.

Environmental Trends o The most important environmental trends are economic trends, social trends, technological advances, and political and regulatory changes o Some industries experience slow or no growth for years, and then experience sudden upswings in growth as environmental change turns in favor of the industry

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You can’t cover every possible fact affecting an industry, but you should mention the major trends

VI.

Long-term Prospects  The industry analysis should conclude with a brief statement of your beliefs regarding the long-term prospects for the industry  No new information should be provided at this point; rather draw from the preceding sections of the industry analysis to support your conclusions

VII.

How the Industry Analysis Affects and Is Affected by Other Sections of the Plan  Industry analysis is a foundational aspect of evaluating the merits of a prospective business venture  A careful analysis of a firm’s industry lays out what is realistically possible and what isn’t realistically possible for a start-up to achieve  Most start-ups are constrained enough by their industries that their performance falls in line with what you would expect after reading their industry analysis  The industry analysis affects other sections of the business plan because it is a point of reference to work from  It helps temper the enthusiasm of business plan writers and provides a useful reference for a plan’s readers

Review Questions 1.

What is an industry? Why is it important to include an ―industry analysis‖ in a business plan? Answer: An industry is a group of firms producing a similar product or service, such as airplanes, music, electronic games, or fitness club memberships. The industry analysis helps set up and support the remainder of the plan.

Why is it important that the industry analysis focus strictly on a firm’s industry rather than its industry and its target market simultaneously? Answer: The reason it’s important to separate the analysis of a firm’s industry and its target market is that it’s premature for a new firm to select, or even talk about, a specific target market until an understanding of the broader industry is obtained.

Why is it important for an industry analysis to appear early in a business plan? Answer: The industry analysis should appear early in the plan because it logically precedes the analysis of a firm’s target market and marketing strategy.

Why is identifying a company’s industry a tough call in many instances? Answer: Identifying a company’s industry can be difficult because a firm’s industry can be defined narrowly or broadly (e.g., fitness center industry or recreation industry).

What should you do if your firm operates in more than one industry?

liii Answer: If your firm operates in two or more industries, you should identify all the industries that it participates in and recognize that it will be necessary to conduct an industry analysis for each of the industries. Some discretion is allowed regarding the weight placed on the individual analyses. In some instances, when a firm operates in more than one industry, it may be appropriate to conduct a full analysis on the primary industry that firm operates in and an abbreviated analysis on the other. 6.

What are the four general rules-of-thumb for completing the industry size, growth, and sales projections portion of the industry analysis? Answer: (1) Always display financial information, such as industry sales and growth rate, in a multiyear format, making it easy to spot trends. (2) Display your information graphically, if possible. (3) Provide information about your industry on a regional or local basis if appropriate. (4) Avoid the temptation to report only positive or flattering information about your industry.

What topic should be discussed in the industry structure portion of an industry analysis? Why are these topics important? Answer: The topic of industry structure is particularly important. Structure refers to how concentrated or fragmented an industry is and whether the industry’s competitive landscape is generally attractive or unattractive. An industry’s size and its growth rate, regardless of how positive they are, are basically moot points if an industry isn’t structurally attractive for a start-up.

Why is it important to know how an industry is segmented? Answer: Understanding which segments of your industry are growing fastest or are most profitable can help you establish credibility in your business plan. Some industries are also clearly bifurcated, where the most successful companies serve the top end of the industry or the bottom end. The worst place to be in a bifurcated industry is right in the middle.

Why is knowledge of the key success factors in an industry important? How can an industry’s key success factors be identified? Answer: Key success factors in every industry define what an organization in the industry has to be good at to be successful. Most industries have 6 to 10 key success factors that, if not readily apparent, can be identified by reading IBISWorld and Mintel industry profiles and looking at industry trade journals and magazines.

10.

Why is the industry trends portion of the industry analysis arguably the most important section of the analysis? Answer: The industry trends portion of an industry analysis is arguably the most important section because it often lays the foundation for a new business idea in an industry and it typically provides the justification for claims made earlier in the industry analysis.

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Application Questions 1.

You just reviewed a business plan for a company that will make a fitness app that will allow its users track their exercise and monitor their fitness in an innovative way. One thing you noticed is that the plan didn’t include an industry analysis. When you asked Caleb, the author of the plan, why the industry analysis was left out, he said, ―Are you kidding? My industry is one of the hottest ones in America. I just read an article that said Health and Fitness apps are one of the top categories in both the Apple and the Android App Store. An industry analysis isn’t necessary.‖ Do you agree with Caleb? If he said to you, ―Okay, persuade me that an industry analysis is necessary,‖ what would you tell him? Answer: A firm’s industry analysis lays out what is realistically possible and what isn’t realistically possible for it to achieve. Most start-ups are constrained enough by their industries that their performance falls in line with what you would expect after reading their industry analysis. The industry analysis also affects other sections of the business plan because it is a point of reference to work from. It also helps to temper the enthusiasm of business plan writers and provides a useful reference for a plan’s readers.

Cybex International (http://www.cybex.com) is a company that makes premium exercise equipment for home and commercial use. What industry is Cybex in? (Provide both an SIC and NAICS code.) Report the industry’s past three years of sales, sales growth, and make a prediction for its sales and sales growth for the next year. Is the industry fragmented or concentrated? What are the environmental and business trends working for and against the industry’s future growth? On a scale of 1–10 (10 is high), how attractive of an industry is the industry Cybex participates in for a startup to enter? Explain your answer. Answer: Cybex operates in the Sporting & Athletic Goods Manufacturing industry (SIC code—3949 & NAICS code—339920). Industry data will change on an annual basis.

Jennifer Carroll, a high school classmate of yours, is thinking about starting a company to compete with Crafty.com, the company that makes instructional videos for people who are interested in learning crafts such as knitting, quilting, crocheting, and cake decorating. Jennifer is writing a business plan and is working on the industry analysis. Jennifer is having trouble nailing down the exact industry she will be competing in and is having trouble finding sources of information to help her discern the environmental trends that are impacting her industry. If Jennifer asked for your help, how would you help her determine the industry her instructional video company will participate in, and what suggestions would you give her for finding information on the environmental trends that are impacting her industry? Answer: The best Internet resources to assist in helping identify industries, and in completing all sections of the industry analysis, are IBISWorld, Mintel, and Standard & Poor’s NetAdvantage. The most important environmental trends are economic trends, social trends, technological advances, and political and regulatory changes. One place to look to get started thinking about these trends is Standard & Poor’s NetAdvantage assessment of the future of the industry. Copyright © 2015 Pearson Education, Inc.

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Brooklyn Salsa (www.bksalsa.com) is a company that has launched an exciting new line of salsa dips and related products. Spend a few minutes looking at Brooklyn Salsa’s Web site and studying its business concept. If the founders of Brooklyn Salsa had carefully studied the salsa segment of the broader food industry before coming up with their business idea, what factors about the salsa segment or the food industry might have led them to the idea for Brooklyn Salsa? Answer: Student responses will vary but should address issues supportive of the increased interest in healthy and eco-friendly food products. Responses may address the focus on fun, health, organic, sustainable, and local ingredients, and a desire for unique formulations at the high end of the industry.

One industry mentioned in the chapter that is fairly ―hot‖ is the mattress industry. Spend enough time studying the mattress industry to determine whether it is structurally attractive for new entrants. Report your conclusions. Answer: Student responses will vary.

Additional Activities 1. Who Has the Answer? Purpose: to stimulate students to learn the key terms and concepts in this chapter. This activity should be used as an introduction (or icebreaker) for this chapter. Select three or four possible exam or quiz questions for this chapter, and share them with your students at the very beginning of the class meeting. Instruct the students, at your signal, to stand up, leave their desks, and go visit as many students (who are not in their team) as they can in the next three minutes. Their goal is to share and compare their answers to the three (or four) questions you just shared with them. When the three minutes are up, ask them to share their answers with the entire class, but do not tell them the correct answers yet. Instead, reveal the correct answers to the questions as you move through your lecture.

2. A Life or Death Decision Purpose: to demonstrate the importance of researching industry trends and to raise the possibility of being successful even in a declining industry. After lecturing on industry trends, ask students to identify an industry that is dying. Choose one of their examples, and then instruct them to turn to another student sitting next to them to identify some trends in that industry that would convince you to not enter into that industry. Give them one minute only, and then ask for them to share their list of negative trends associated with that industry. Now, ask students to assume that they have just invented a new product that can be successful in this same dying industry. Ask them to now identify firm-level key success factors they must develop in order to be successful in this dying industry. Ask students to share their results with Copyright © 2015 Pearson Education, Inc.

lvi the rest of the class, and emphasize that it is possible for a business to become successful even in a declining industry.

3. Practicing with Porter Purpose: to encourage students to analyze an industry using Porter’s Five Forces model and to identify if an industry is attractive and profitable or not. After lecturing on Porter’s Five Forces model, ask them to form discussion groups. Their goal is to use the model to analyze an industry that all are likely to be familiar with. (Example: retail shoe stores or beer manufacturers.) Provide this matrix for them to complete: Force

Level of Attractiveness/Profitability Low Medium High

Threat of Substitute Products/Services Threat of New Entrants into the Industry Rivalry Among Existing Firms Bargaining Power of Suppliers Bargaining Power of Buyers Remind the students to appoint a scribe to record their decisions. Give them 10 to 15 minutes to complete their analysis. At the end of the time period, ask the scribes to share the team’s answers and to identify whether the industry is an attractive one to enter. Listen carefully to ensure that students have correctly interpreted the five forces. Many students confuse threat of substitutes with rivals, and mix up suppliers and buyers.

Chapter 6 Market Analysis Key Words Market analysis—breaks the industry into segments and zeroes in on the specific segment (or target market) that the firm will tackle High-involvement purchase—a purchase for which the buyer is prepared to spend a considerable amount of time and effort searching Low-involvement purchase—a purchase that a buyer makes with a minimum of thought because it does not have much impact on his or her life Direct competitors—businesses that offer a product that is very similar to yours Indirect competitors—competitors that offer close substitutes to the product that you will be offering. Future competitors—companies that are not yet direct or indirect competitors but could move into one of these roles at any time Competitive intelligence—the process of gathering information about your competitors

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Chapter Overview This chapter introduces the market analysis portion of the business plan. Be aware that this section is distinct from the marketing section, which will be discussed in Chapter 7. In the market analysis section, we will focus on the firm’s target market, customers, and competitors, how it will compete in the marketplace, and potential sales and market share.

Chapter Summary 1. The marketing analysis section of a business plan is distinctly different from the marketing section. The market analysis section focuses on describing a firm’s target market, customers, and competitors; how it will compete in the marketplace; and potential sales and market share. In contrast, the marketing section focuses on the classic marketing functions, including product, price, promotion, and distribution. 2. The market analysis is an extremely important section of a business plan for two reasons. First, it helps define the nature of the business and the remainder of the plan. Second, it affirms that a company has a well-thought-out target market, understands its customers, and can generate sales in the face of competition. 3. Market segmentation is the process of dividing a market into distinct subsets (or segments) that behave in the same way or have similar needs. An exciting element of the entrepreneurial process is that it often results in the identification of new segments of an industry that weren’t previously considered. 4. After a firm segments its market, it selects a segment within the market to target. The biggest mistake that people make when selecting a target market is to define their market too broadly or to try to target more than one segment simultaneously. Startups are usually best served by zeroing in on a specific target market. 5. Estimating the size of a target market can be a tricky proposition. The first rule of thumb is to not make frivolous predictions. The key is to explain the path that leads you to your conclusions. If you are producing a product that is an enhanced version of something that is already available, the numbers will be fairly easy to get. Estimating the size of a target market for a market that doesn’t exist is harder. 6. It’s important to include a section in the market analysis that deals directly with the behavior of the consumers in a firm’s target market. The more a startup knows about the consumers in its target market, the more it can gear products or services to accommodate their needs. 7. A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to gain a competitive advantage in one or more areas. 8. A firm’s competitors include direct competitors, indirect competitors, and future competitors. 9. A competitive analysis grid is a tool for organizing and presenting the information you collect about your competitors.

lviii 10. There are four basic ways for a firm to estimate its initial sales: contacting trade associations, finding comparable firms, finding sales estimates for comparable firms in magazine and newspaper articles, and using the multiplication method.

Chapter Outline I. II.

III. IV.

Introduction Market Segmentation and Target Market Selection a. Market Segmentation b. Selecting a Target Market c. Target Market Size and Trends Buyer Behavior Competitor Analysis a. Identification of Direct, Indirect, and Future Competitors b. Competitive Analysis Grid Estimate of Annual Sales and Market Share

Chapter Notes I.

Introduction  Market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) that the firm will tackle  The market analysis section of a business plan is distinctly different from the marketing section  The market analysis section focuses on describing a firm’s target market, customers, and competitors, how it will compete in the marketplace, and potential sales and market share  The market analysis is an extremely important section of a business plan for two reasons: o The market analysis helps define the nature of the business and the remainder of the plan o It affirms that a company has a well-thought-out target market, understands its customers, and can generate sales in the face of competition  To raise investment capital, a firm must demonstrate that its target market has sufficient potential to enable it to rapidly increase sales and return to its investors an amount that is 5 to 20 times the original investment  Gaining this degree of insight and knowledge generally requires entrepreneurs to conduct both primary and secondary research

II.

Market Segmentation and Target Market Selection  A firm must answer the basic question, ―Who are our customers, and how will we appeal to them?‖  In some cases, a firm will have two markets, and you should describe the characteristics of both markets a.

Market Segmentation

lix o o

o o

Market segmentation is the process of dividing a market into distinct subsets (or segments) that behave in the same way or have similar needs Markets can be segmented in many ways, such as by geography (city, state, country), demographic variables (age, gender, family size, income), psychographic variables (personality, lifestyle, values), behavioral variables (benefits sought, product usage rate, brand loyalty), and product type (varies by product) There are requirements for successful market segmentation:  Homogeneity of needs and wants within the segment  Heterogeneity of needs and wants among segments  Differences within the segment are small compared to differences across segments  The segment is distinct enough that its members can be easily identified  It should be possible to determine the size of the segment  The segment should be large enough to be profitable IBISWorld and Mintel provide suggestions for segmenting the industries that they follow The entrepreneurial process often results in the identification of new segments of an industry that weren’t previously considered

Selecting a Target Market o After a firm segments its market, it selects a segment within the market to target o A big mistake is to define the target market too broadly or to try to target more than one segment simultaneously o Focusing intently on a single market allows a firm to become an expert in a specialized area rather than trying to spread itself too thin o A firm should assess the size of the market to make sure it is large and healthy enough to meet the firm’s objectives

Target Market Size and Trends o Estimating the size of a target market can be tricky; in many cases, you must literally invent a methodology for making an estimate o The key is to explain the path that led to your conclusions o If you are producing an enhanced version of something that is already available, numbers will be fairly easy to get o Estimating the size of a target market for a market that doesn’t currently exist, or a market that is specific to a particular location or geographic area, is harder o Readers will normally judge projections based on (1) the reasonableness of the assumptions made, (2) the degree to which the numbers are anchored in facts, and (3) the extent to which it appears that a good faith effort was made to be as accurate as possible

lx o

The best recourse, if you are stuck, is to talk with a reference librarian to see if there are additional information resources; editors of industry-specific trade journals and directors of trade associations are also good sources of information This section should also comment on industry trends that have the potential to affect the target market positively or negatively

III.

Buyer Behavior  It’s important to include a section that deals directly with the behavior of the consumers in a firm’s target market  In many business-to-business start-ups, it’s important to discern specifically who the ―decision makers‖ are in the businesses you’ll be trying to sell to  The length of a customer’s buying process is often an important concern o A high-involvement purchase is one for which the buyer is prepared to spend a considerable amount of time and effort searching o A low-involvement purchase is one that a buyer makes with minimum thought because it does not have much impact on his or her life

IV.

Competitor Analysis  A competitor analysis is a detailed analysis of a firm’s competition  It helps a firm understand the positions of its major competitors and the opportunities that are available  You should never say that you don’t have any competitors a.

Identification of Direct, Indirect, and Future Competitors o The first step in a competitor analysis is determining who the competition is o You should list a handful of competitors from each category comprising your direct competitors, indirect competitors, and future competitors:  Direct competitors—businesses that offer a product that is very similar to yours, targeting the same customers that you are  Indirect competitors—offer close substitutes to the product you will be offering, targeting the same basic need that will be met by your product  Future competitors—companies that are not yet direct or indirect competitors but could move into one of these roles at any time o You should provide a short assessment of the scope and intensity of your competition o The next section focuses on your competitive analysis grid, which compares your firm to your major competitors o The competitive analysis grid will require you to engage in competitive intelligence, which is the process of gathering information about your competitors

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Show the key success factors for firms in your target market on the vertical axis of the grid, and then show your firm along with your four or five major direct competitors on the horizontal axis  In each box, rate yourself relative to your competitors on each of key success factors Completing the competitive analysis grid may reveal that you’re at a disadvantage over your competitors and help you make adjustments

Estimate of Annual Sales and Market Share  The final section of the market analysis focuses on computing an estimate of your firm’s initial annual sales and market share  There are four basic ways for a new firm to estimate its initial sales: o Contact the premier trade associations in your industry and ask if they track sales numbers for businesses that are similar to the business you plan to start o Find a comparable firm, or a company that sells a comparable product o Conduct Internet searches to try to find magazine and newspaper articles that focus on firms in your industry o Use a multiplication method to try to arrive at a reasonable number  Sometimes the multiplication method gets fairly complicated, requiring that you consider several industries and conduct primary research to get a good estimate  The ideal scenario for start-ups is to use all four methods of estimating initial sales, and then compare estimates

lxii Review Questions 1. Explain the purpose of the market analysis section of a business plan. Answer: The market analysis is an extremely important section of a business plan for two reasons. First, it helps define the nature of the business and the remainder of the plan. Second, it affirms that a company has a well-thought-out target market, understands its customers, and can generate sales in the face of competition. 2. Describe the difference between the market analysis section and the marketing plan section of a business plan. Answer: The marketing analysis section of a business plan is distinctly different than the marketing section. The market analysis section focuses on describing a firm’s target market, its customers, its competitors, how it will compete in the marketplace, and its potential sales and market share. In contrast, the marketing section focuses on the classic marketing functions, including product, price, promotion, and distribution. 3. Explain the process of market segmentation and why it’s important for a firm to select a specific target market. Answer: Market segmentation is the process of dividing a market into distinct subsets (or segments) that behave in the same way or have similar needs. The biggest mistake that people make when selecting a target market is to define their market too broadly or to try to target more than one segment simultaneously. Start-ups are usually best served by zeroing in on a specific target market. 4. Describe the requirements for successfully segmenting a market. Answer: There are requirements for successful market segmentation:  Homogeneity of needs and wants within the segment  Heterogeneity of needs and wants among segments  Differences within the segment are small compared to differences across segments  The segment is distinct enough that its members can be easily identified  It should be possible to determine the size of the segment  The segment should be large enough to be profitable 5. What is the biggest mistake that people make when selecting a target market? Answer: The biggest mistake that people make when selecting a target market is to define their market too broadly or to try to target more than one segment simultaneously. 6. Why is estimating the size of a target market referred to as a ―tricky‖ proposition? Answer: The first rule of thumb is to not make frivolous predictions. The key is to explain the path that leads you to your conclusions. If you are producing a product that is an enhanced version of something that is already available, the numbers will be fairly easy to get. Estimating the size of a target market for a market that doesn’t exist is harder. 7. Describe why it’s important to include a section on ―buyer behavior‖ in a business plan.

lxiii Answer: It’s important to include a section in the market analysis that deals directly with the behavior of the consumers in a firm’s target market. The more a start-up knows about the consumers in its target market, the more it can gear its products or services to accommodate their needs. 8. Explain the purpose of a competitor analysis. Answer: A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to gain a competitive advantage in one or more areas. 9. Explain why it’s important to collect competitive intelligence, and describe some of the techniques that are used to collect it. Answer: To complete a meaningful competitive analysis grid, you must first understand the strategies and behaviors of your competitors. This requires you to engage in competitive intelligence. You can gather competitive intelligence by: attending conferences and trade shows, reading industry-related trade publications, reading industry reports via online resources, purchasing competitor’s products to understand their features, benefits, and shortcomings, talking to customers about what motivated them to buy your product as opposed to your competitors’ products, and studying competitors’ websites. 10. Briefly describe the four separate ways of estimating the annual sales and market share of a new business. Answer: There are four basic ways for a new firm to estimate its initial sales: (1) Contact the premier trade associations in your industry and ask if they track sales numbers for businesses that are similar to the business you plan to start, (2) find a comparable firm or a company that sells a comparable product, (3) conduct Internet searches to try to find magazine and newspaper articles that focus on firms in your industry, and (4) use a multiplication method to try to arrive at a reasonable number.

Sometimes the multiplication method gets fairly complicated, requiring that you consider several industries and conduct primary research to get a good estimate. Application Questions 1. Recreate Prime Adult Fitness’s estimate of the size of its target market, and substitute the county that your college of university is located in for Seminole County, Florida. How do your numbers compare with the numbers reported in Prime Adult Fitness’s estimate? Student responses will vary depending upon location-specific information. 2. Prepare a competitive analysis grid for Runkeeper (www.runkeeper.com), a company that makes an iPhone app that tracks workouts. Summarize what you learn about Runkeeper’s competitive landscape and its points of differentiation through this exercise. Answer: Student responses will vary. 3. Put yourself in the place of an investor listening to Prime Adult Fitness present the market analysis portion of its business plan. Think of three penetrating questions that you would ask about the market analysis. Copyright © 2015 Pearson Education, Inc.

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Answer: Student responses will vary. 4. Imagine you’re writing the business plan for a smoothie shop that you plan to launch near the campus of the college or university you attend. Make an estimate of your Year 1 sales using the bottom–up approach to the multiplication method. Answer: Student responses will vary.

5. Fitstar (www.fitstar) is a company that produces an app that turns an iPad into a personal trainer. When Fitstar first started (with a single app that offered personal training sessions via an iPad), how would you have estimated Fitstar’s initial sales? Select one or more of the four ways of estimating a new firm’s sales outlined in the textbook, and explain how you would have utilized each method. Answer: Student responses will vary.

Additional Activities 1. What? So What? Purpose: to demonstrate the difficulty of defining the nature of a business. This activity pairs students to challenge each other in an effort to narrow their explanations of the benefits of a product or service. Conduct this activity after introducing the purposes of market analysis. Begin by putting students into triads. Ask two of the students to each find one item currently in their possession (pockets, book bags, purses, etc.) and put it on the table in front of them. For example, this might be a wallet or cell phone. The third student is appointed as a scribe and is tasked with observing and taking notes during the activity. Set a time limit of about 5 minutes per student, for a total of 10 minutes total. One at a time, each student will describe the benefits of owning the article. The other student will continuously ask, ―What?‖ and ―So what?‖ This forces the student to improve his or her definition of the product’s features and benefits. When the activity has been completed, ask the observers to discuss how the definitions of the products evolved over the course of the activity. Ask the student who presented a product for their analysis of what happened when they were challenged by the other student.

2. Competitor Matrix Purpose: to practice identifying key success factors of competitors.

lxv After lecturing on the competitive analysis grid, tell students it is time to apply what they just learned. Although this activity can be conducted as an individual assignment, it is probably most effective when done in groups. Choose one well-known local business for all the groups to research. For example, choose a local hair salon or sports bar. This will incite a bit of competition between the groups, making it more enjoyable. (When students are having fun, they learn and retain more.) Restrict the number of competitors to be included in the matrix to three or four. Begin by asking the entire class to identify one or two of the key success factors for this firm, but do not identify more than two. For example, a key success factor might be a good location. Then ask them to identify one of this firm’s competitors. You just want them to get started, but have the groups to identify another four or five factors as well as two or three competitors independently from the other groups. Next ask the groups to create a competitor matrix for this business. Give them a set period of time to complete the process; 15 minutes might be sufficient. At the end of the time period, ask each group to present their competitor matrix to the rest of the class. Encourage the students to ask questions of and provide constructive critiques of the presenters.

3. Trade Associations Purpose: to determine the extent of information available from trade and professional associations. This is a challenging task, as many associations will not provide revenue estimates to nonmembers. Assign students to identify all of the trade or professional associations for a common type of business, such as a shoe store or bakery; this will require them to conduct some research to locate the association or associations. The best sources of information include the Encyclopedia of Associations and the Dictionary of Associations, neither of which is extensively available on the Internet. However, if your campus library has a subscription to Associations Unlimited, students can access both of these publications. Once they have identified the associations, students are to then contact the associations and demonstrate their creativity to attempt to determine the association’s estimate of annual sales for a small business. This activity may require three to four weeks for students to complete. Ask students to share their results in class. Consider offering extra credit or a prize for the student who demonstrated the most creative method of obtaining this information from an association.

4. Distant Competitors Purpose: to determine the extent of information available from competitors. This is a challenging task as students may encounter business owners who refuse to participate. Fortunately, this happens far less often than students expect, as most business owners (if approached tactfully) are happy to help others. Assign students to choose a common type of business, such as a shoe store or bakery, for this activity. Advise them that they are to identify one or two competitors of this business that are geographically so distant from a local business that there is no competition between them. Copyright © 2015 Pearson Education, Inc.

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Once they have identified the distant competitors, students are to then contact the competitors and demonstrate their creativity to attempt to determine the competitors’ estimates of annual sales for a new small business similar to theirs that might be opening in your community. This activity may require three to four weeks for students to complete. Ask students to share their results in class. Consider offering extra credit or a prize for the student who demonstrated the most creative method of obtaining this information from a distant competitor.

Chapter 7 Marketing Plan Key Words Marketing strategy—refers to a firm’s approach to marketing its products and services stated in broad terms Position—concerned with how a firm is situated relative to its rivals (or potential rivals) Product attribute map—created by articulating two of a product’s most important attributes, one on the x-axis and the other on the y-axis Cost-based pricing—list price is determined by adding a mark-up percentage to a product’s cost Value-based pricing—list price is determined by estimating what consumers are willing to pay for a product, and then backing off a bit to provide a cushion Gross margin—a company’s net sales minus its cost of goods sold Price-quality attribution—consumers naturally assume that the high-priced product is also the better quality product Sales process (or cycle)—refers to the steps the firm goes through to establish relationships with customers and close sales Advertising—making people aware of a product in hopes of persuading them to buy it Buzz—word-of-mouth advertising for a product or service; creating awareness and a sense of anticipation about a company and its offerings Distribution—encompasses all the activities that move a firm’s product from its place of origin to the consumer Channel conflict—when a business sells online (capturing all the profits itself) and also wants retailers to sell its products through its stores.

Chapter Overview This chapter builds on Chapter 6, which discussed the market analysis by introducing the marketing plan portion of the business plan. This chapter focuses on how the firm will actually find customers and close sales. It also deals with the nuts and bolts of marketing in terms of price, promotion, distribution, and sales.

Chapter Summary 1.

The best way to describe a company’s marketing plan is to start by articulating its marketing strategy, its' positioning, and its' points of differentiation, and then talk about Copyright © 2015 Pearson Education, Inc.

lxvii how these overall aspects of its plan will be supported by its price, its promotional mix and sales process, and its distribution strategy. If you haven’t discussed your product yet, it should be talked about here. 2.

3. 4. 5.

8. 9.

10. 11.

There are two things to be particularly mindful of as you write the marketing section of your business plan. First, all the elements of a firm’s marketing plan should be developed with the customer plainly in mind. Second, you must detail exactly who will sell your product or service. This marketing section of the business plan contains four subsections: overall marketing strategy, pricing strategy, sales process and promotions mix, and distribution and sales. A firm’s marketing strategy is its approach to marketing its products or services stated in broad terms, which forms the basis of all of its marketing-related activities. After selecting a target market, the next step is for a firm to select a ―position‖ in the market. Position is concerned with how a firm is situated relative to its rivals. In a sense, a position is a part of a market or a specific target market that a firm is claiming for its own. Price is an important issue because it determines how much money a company can earn. The price a company charges for its products also sends a clear message to its target customers. The two methods for determining the price of a product or service are cost-based and value-based pricing. In cost-based pricing, the list price is determined by adding a markup percentage to a product’s cost. In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product, and then backing off a bit to provide a cushion. Most experts recommend value-based pricing because it hinges on the perceived value of a product or service rather than cost-plus markup, which is a formula that ignores the customer. A firm’s sales process (or cycle) refers to the steps it goes through to establish relationships with customers and close sales. Advertising is making people aware of a product in hopes of persuading them to buy it. The major difference between public relations and advertising is that public relations isn’t paid for. As a result, many start-ups emphasize public relations over advertising because it’s free and it helps build the firm’s credibility. One issue that is particularly important in executing a promotions plan is to focus on the benefits of a product or service rather than the features. Distribution encompasses all the activities that move a firm’s product from its place of origin to the consumer.

Chapter Outline VI. VII.

VIII.

IX.

Introduction Overall Marketing Strategy a. Positioning Strategy b. Points of Differentiation Pricing Strategy a. Cost-Based Pricing vs. Value-Based Pricing b. Other Pricing-Related Issues Sales Process and Promotions Mix a. Sales Process Copyright © 2015 Pearson Education, Inc.

lxviii b.

Promotions Mix i. Advertising ii. Public Relations iii. Social Media iv. Other Promotions-Related Activities Distribution and Sales a. Distribution and Sales Alternatives b. Sales Strategy and Related Issues

Chapter Notes I.

Introduction  This chapter focuses on how the firm will actually find customers and close sales  It deals with the nuts and bolts of marketing in terms of price, promotions, distribution, and sales  Describe a company’s marketing plan by articulating its marketing strategy, positioning, and points of differentiation and how they will be supported by price, promotional mix, and sales process and distribution strategy  The marketing section of the business plan must lay out specifically how you plan to make your target market aware of the existence of your product or service  Reinforce how your product provides its user unique value and differs from similar products in the marketplace  There are two things to be mindful of as you write this section: o The elements of a firm’s marketing plan should be developed with the customer plainly in mind o You must detail exactly who will sell your product and how your sales process will work  Describe your sales process and the methods that you’ll use to sell your product (e.g., via direct sales force, through distributors or wholesalers, through an alliance with companies that sell complementary products, or through some other means)

II.

Overall Marketing Strategy  Marketing strategy refers to a firm’s approach to marketing its products and services in broad terms, which forms the basis of all its marketing-related activities  Begin the marketing plan section by articulating your marketing strategy because it sets the tone for the entire section  Another important reason for having a marketing strategy and for articulating it in a business plan is to make sure that a firm’s marketing efforts are consistent with its overall mission and understanding of the market a.

Positioning Strategy o After selecting a target market, the next step is for a firm to select a ―position‖ in the market o Position is concerned with how a firm is situated relative to its rivals (or potential rivals) o Determining which position to occupy and compete in is simply a judgment call on the part of a company based on its mission, its Copyright © 2015 Pearson Education, Inc.

lxix overall approach to the marketplace, and its competitive landscape b.

III.

Points of Differentiation o You should also clearly articulate your specific points of differentiation early in the marketing plan section of your business plan o It’s typically best to limit the points of differentiation that you talk about to two or three points, to make them memorable and distinct o Make sure your points of differentiation aren’t liabilities, if a discerning reader starts playing devil’s advocate o The most compelling forms of differentiation are created through innovations that are difficult to imitate because they are created by competencies unique to a firm o A useful way for a start-up to visually depict its primary point of differentiation is through a product attribute map  A product attribute map is created by articulating two of a product’s most important attributes, one on the x-axis and the other on the y-axis

Pricing Strategy  This section should explain how you plan to price your product or service  The price a company charges for its products also sends a clear message to its target customers  State how you plan to price your product or services and provide a brief rationale for your pricing philosophy a.



Cost-Based Pricing vs. Value-Based Pricing o The two methods for determining the price of a product or service are cost-based pricing and value-based pricing:  In cost-based pricing, the list price is determined by adding a markup percentage to a product’s cost  The advantage of this method is that it’s straightforward and easy to justify  The disadvantage is that it’s not always easy to estimate what the costs of a product will be, particularly for a start-up  Companies are also finding it increasingly difficult to dictate prices to customers given customers’ ability to comparison shop on the Internet to find what they believe is the best price  In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product and then backing off a bit to provide a cushion Sometimes, to make this determination, a company has to conduct focus groups or try different pricing options in test markets

lxx o o

IV.

Most experts recommend value-based pricing because it hinges on the perceived value of a product or service rather than costbased pricing, which ignores the customer Value-based pricing also frequently produces a higher gross margin (a company’s net sales minus cost of goods sold)

Other Pricing-Related Issues o Most experts warn start-ups to resist the temptation to charge a low price for their products in hopes of capturing market share o Most consumers make a price-quality attribution, naturally assuming that the higher-price product is also the better quality product o The price you’re able to charge is largely a function of: (1) the objective quality of your product or service and (2) the perception of value that you create in the minds of your customers relative to competing products in the marketplace

Sales Process and Promotions Mix  A firm’s sales process (or cycle) depicts the steps it goes through to identify prospects and close sales  Promotions mix refers to the specific tactics it uses, such as advertising and public relations, to support the sales process and enhance its overall brand  Sales and promotions is one area where hard work and ingenuity can make up for a lack of funds  Money can also be easily wasted if the sales process is not carefully thought through and executed a.

Sales Process o Sales process (or cycle) varies by firm, but normally includes the following steps: 1. Prospect for (or gather) sales leads 2. Make the initial contact 3. Qualify the lead 4. Make the sales presentation 5. Meet objections and concerns 6. Close the sale 7. Follow up o Following a structured process to generate and close sales benefits a firm in two ways: (1) it enables a firm to fine-tune its approach to sales and build uniformity into the process and (2) it helps a firm qualify leads, so the firm can spend its time and money pursuing the most likely buyers

Promotions Mix o Promotions mix includes the specific tactics that a firm uses to communicate with potential customers including advertising, public relations, and other promotions-related activities i.

Advertising

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ii.

Advertising is making people aware of a product in hopes of persuading them to buy it The major goals of advertising are to raise customer awareness of a product, explain a product’s comparative features and benefits, and create an association between a product and a certain lifestyle (or a certain objective in a business-to-business context) Media include direct mail, magazines, newspapers, radio, the Internet, television, and billboard advertising Media used normally depends on the firm’s target market There are many downsides to conventional forms of advertising, which steers start-ups away from advertising on a broad basis:  Low credibility  Possibility that high percentage of viewers will not be interested  Message clutter  Relative costliness  Perception that advertising is intrusive  Possibility that poorly crafted ads run risk of irking target market Most start-ups tend to be selective in advertising efforts, such as limiting their print ads to industry trade journals or using focused pay-perclick

Public Relations  Public relations refers to efforts to establish and maintain a company’s image with the public  The major difference between public relations and advertising is that public relations isn’t paid for  Examples of public relations techniques include:  Press releases  Media coverage  Articles about the firm in newspapers, magazines, or industry press  Blogging  Monthly newsletters  Civic, social, and community involvement  Generating favorable public relations is better than advertising because it is more grassroots and doesn’t seem to be as self-serving

lxxii 

iii.

iv.

The key to getting media coverage is to have a story to tell, rather than simply extolling the value of your product or service

Social Media  Social media consists primarily of blogging and establishing a presence and connecting with customers though sites like Twitter, Facebook, and Google+.  The number one rule is to determine if a business’s target market are active social media users.  The largest group of social media users for men is in the 45-54-year age group and for women in the 25-34-years age group. Other Promotions-Related Activities  Some firms give away free samples or trial memberships as a way of exposing potential customers to their product or service  This type of initiative is often pursued to create ―buzz‖ or word-of-mouth advertising  Buzz means creating awareness and a sense of anticipation about a company  In most cases, putting together a specific budget for promotional activities is helpful

Distribution and Sales  Distribution encompasses all the activities that move a firm’s product from its place of origin to the consumer  This section of your business plan clearly identifies your distribution and sales plan in terms of who will make the sales a.

Distribution and Sales Alternatives o The first step in determining a distribution and sales strategy is to sort through the choices o The key to making the right choices among the alternatives is to think carefully about where people in your target market shop, and then about the most effective and economical ways to get your products in these outlets o Selecting the manner to distribute and sell a product or service is not a trivial issue; this critical issue lies at the heart of a firm’s overall marketing plan and its ability to effectively reach its target market

Sales Strategy and Related Issues o Your description should make it clear whether you plan to field your own sales force

lxxiii o o o

Describe how many salespeople you will initially need, how their numbers will be ramped up as your company grows, and how they will be compensated If distributing via intermediaries, describe how they will be chosen, and the ways in which the intermediaries will interface with the sales outlets in your industry One way a new firm can innovate and provide unique value in the marketplace is via distribution and sales

Review Questions 1.

Describe the difference between the market analysis chapter of a business plan and the marketing chapter. Answer: Whereas the market analysis focused on describing a firm’s target market, customers, competitors, and potential sales, the marketing plan focuses on how the firm will actually find customers and close sales.

Why is it important for the marketing plan to be developed with the customer plainly in mind? Answer: Beyond producing a product or service that accommodates your customers’ needs, you should know the amount of disposable income they have, the periodicals they read, the media they watch, and so on in order to fine-tune your marketing strategy and lower costs.

What is a company’s marketing strategy and why is it important? Answer: A firm’s marketing strategy is its approach to marketing its products or services stated in broad terms, which forms the basis of all of its marketing-related activities.

What is meant by a company’s ―positioning‖ strategy? Answer: After selecting a target market, the next step is for a firm to select a ―position‖ in the market. Position is concerned with how a firm is situated relative to its rivals. In a sense, a position is a part of a market or a specific target market that a firm is claiming for its own.

What is the purpose of a product attribute map? Answer: A product attribute map is a useful way to visually depict a firm’s primary point of differentiation by articulating two of a product’s most important attributes and Copyright © 2015 Pearson Education, Inc.

lxxiv plotting this data relative to competitors. 6.

Describe the difference between cost-based pricing and value-based pricing. Answer: In cost-based pricing, the list price is determined by adding a markup percentage to a product’s cost. In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product, and then backing off a bit to provide a cushion.

What is the price-quality attribution? Answer: Most consumers make a price-quality attribution, naturally assuming that the higher price product is also the better quality product.

Describe the differences between advertising and public relations? Which of the two alternatives do start-ups tend to prefer? Answer: Advertising is making people aware of a product in hopes of persuading them to buy it. The major difference between public relations and advertising is that public relations isn’t paid for. As a result, many start-ups emphasize public relations over advertising because it’s free and it helps build the firm’s credibility.

Provide several examples of public relations strategies. Answer: Examples of public relations techniques include: o Press releases o Media coverage o Articles about the firm in newspapers, magazines, or industry press o Blogging o Monthly newsletters o Civic, social, and community involvement

10.

Describe how firms should approach the topic of distribution and sales. Answer: This section of your business plan should clearly identify your distribution and sales plan in terms of who will make the sales. To assist you with thinking through these issues, focus on (1) distribution and sales alternatives and (2) sales strategy and related issues. This critical issue lies at the heart of a firm’s overall marketing plan and its ability to effectively reach its target market.

Application Questions 1.

Spend some time looking jitterbug’s Website (www.greatcall.com/jitterbug). Comment on each element of jitterbug’s marketing plan (product, price, promotion, and distribution and sales). On a scale of 1 to 10 (10 is high), rate the strength jitterbug’s overall marketing plan. Justify your rating. Answer: Student responses will vary.

lxxv company that makes apparel products for women. Describe ModCloth’s position strategy and its points of differentiation from its competitors. Answer: Student responses will vary. 3.

Study the Website of Game Truck (www.gametruckparty.com), a franchise organization that will bring a video game party in especially equipped trucks directly to your home or business. Make a list of the types of public relations activities that the owners of Game Truck and their franchisees could engage in to promote the company. Answer: Student responses will vary.

Brainstorm a business idea of your own. Write an elevator speech for your business idea following the guidelines for preparing an elevator speech provided in Chapter 1. Next, develop a sales process for your business following the outline provided in Figure 7-3. Answer: Student responses will vary.

Think of a company other than Netflix, Dell or IKEA which has innovated in a very meaningful way in regard to how it distributes and sells its product or service. Write a short critique of how this innovative distribution or sales strategy has contributed to the company’s success. Answer: Student responses will vary.

Additional Activities 1. Burger Wars Purpose: to practice differentiating similar products. After lecturing on differentiation, ask the students to form discussion groups. Tell them they are going to brainstorm for this activity, and remind them of the rules of brainstorming (fast and furious, quantity over quality, piggybacking encouraged, no criticism, appoint a scribe). Their task is to compare fast-food hamburgers sold by two popular companies; have the students identify the two restaurants. Students are to identify as many differences between the two hamburger products as possible within a very short time period (5 to 10 minutes). When time is up, ask the groups to review their lists, and narrow down the list to only the main two or three differences. Then ask the scribes to share their groups’ most important differences with the rest of the class; if possible, have the scribes write these on the board. Finally, ask the entire class to identify how these points are memorable and distinct, and if these two fast-food restaurants do a good job at differentiating their products.

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Purpose: to compare and contrast benefits and features, and practice the sales process. This is a two-part activity; if you have limited time, you could choose to only conduct one of the two parts. Part 1: After lecturing on the differences between benefits and features and the sales process, assign the students to form groups of four students. (If you have a student without a group, assign that student to be an observer of this process.) Hold up a common everyday product, such as a flash drive, paper clip, pen, notebook, briefcase, or textbook. Each foursome is to make a written list first of the features of the product, and then a second written list of the benefits of the product. Give them a short period of time to do so, such as 5 or 10 minutes. Ask each group to first share the features of the product with the rest of the class, while you listen closely for students who have identified benefits rather than features. Repeat the same process with their list of benefits, again listening carefully for confusion with features. Part 2 of this exercise requires the students to pair up with one other person in their group to role play the sales process, selling and buying the same product used in Part 1. Student A plays the role of the salesperson, and Student B plays the role of the customer. Ask the ―customers‖ to play their roles as if they are skeptical or unsure if they really want or need the product. Try to build some competition into the role play to make it more enjoyable for the students, as they will learn more if they have some fun with this. Allow them approximately 10 or 15 minutes to close the sale. After time has expired, ask the customers who chose to purchase the product what convinced them to buy—was it a feature or a benefit? Ask the salespersons what part of the sales process was most difficult or ineffective, and which part was the easiest or most effective.

3. PR Anyone? Purpose: to discover how prevalent free publicity is in the local newspaper. For this activity, you will need copies of the local newspaper or magazine. Ideally, you will have one for each student, but this activity can be accomplished with small groups sharing one newspaper. If the newspaper is large, divide the sections among the various groups of students. After lecturing on public relations, comment on the fact that few small businesses realize the true potential of free publicity to promote their businesses. Then hand out the newspapers and ask students to skim through the articles to locate the names of as many businesses or products and services discussed in an article as they can. They should not choose a product or service that is in a paid article. Assign a time limit of approximately 10 minutes. Debrief the exercise by asking each student or group to share its lists of businesses mentioned in the newspaper or magazine—write the names of the businesses on the board. Then ask students: o How many of these businesses have you heard of prior to reading these articles? o Which of these businesses have you never heard of before? o Have your opinions (of these businesses) improved, stayed the same, or decreased as a result of the articles? Copyright © 2015 Pearson Education, Inc.

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This exercise could also be conducted to focus on social media marketing websites.

4. Pickup or Delivery? Purpose: to demonstrate that a firm’s chosen distribution channel can help to differentiate its products or services from its competitors. After lecturing on distribution and sales alternatives, ask if anyone knows which pizza restaurant was the first to begin delivering pizza. (It was Domino’s ® that first capitalized on this distribution method.) Then ask how many students prefer Domino’s ® over pizzas offered by other restaurants. Now provide groups of students with a list of products and services and ask them to identify which one(s) might also be able to benefit by choosing a distribution method that is unique among the competition. You might include products and services such as chairs, pillows, pet toys, haircuts, and shoes. Debrief by asking each group to share its choices and explain its reasoning.

Chapter 8 Management Team and Company Structure Key Words Options pool—an inventory of company stock, usually around 15 to 20 percent of the total stock, which is set aside for future employees Board of directors—a panel of individuals elected by a corporation’s shareholders to oversee the management of the firm Inside director—a member of the board of directors who is also an officer of the firm Outside director—a member of the board of directors who is not employed by the firm Signaling—when a high-quality individual agrees to serve on a board of a new firm, the individual is in essence indicating or ―signaling‖ that the company has the potential to be successful Board of advisors—a panel of experts asked by a firm’s managers to provide counsel and advice on an ongoing basis Consultant—an individual who gives professional or expert advice Organizational chart—a graphic representation of how authority and responsibility are distributed within a company

Chapter Overview

lxxviii This chapter describes a start-up’s management team and company structure. This part of the business plan is divided into five sections: management team, board of directors, board of advisors, other professionals, and company structure.

Chapter Summary 1.

4. 5.

8. 9.

10.

The management team and company structure section is pivotal in a business plan. Many investors and others who read business plans look first at the executive summary, and then go directly to the management team section to assess the strengths of the people who will be starting the firm. There are two issues that you should be particularly sensitive to as you write the management team and company structure section of your business plan. First, the way your management team is assembled provides an indication of the extent to which you’re open to advice and are able to generate enthusiasm for your firm. Second, as you write the management team section of your business plan you should clearly describe how the management team will evolve. There are three major parts to the management team portion of this section of the business plan: management team personnel, management team ownership and compensation, and common mistakes to avoid. A good way to describe the gaps that exist in a management team is to develop a management team skill profile. You must fully disclose the ownership structure of the new venture and the compensation of the members of the management team in the business plan. A table that shows the names of each of the owners of the firm, along with their age, their percent ownership in the company, and their compensation if they work for the firm is the best method. There are a set of common mistakes to avoid when putting together your initial management team and writing your business plan. These common mistakes include placing unqualified friends or family members in key management positions, assuming that previous success in other industries automatically translates to your industry, presenting a ―one-man team‖ philosophy, hiring top managers who share no ownership in the firm, not disclosing management team skill or competency gaps, and having vague or unclear plans for filling the skill or competency gaps that are disclosed or clearly exist. A board of directors is a panel of individuals who are elected by a corporation’s shareholders to oversee the management of the firm. Many firms have active boards of directors that provide guidance and lend legitimacy to the firm. An advisory board is a panel of experts who are asked by a firm’s managers to provide counsel and advice on an ongoing basis. At times, professionals, such as attorneys, bankers, investors, and consultants, assume important roles in a new venture’s success. These individuals and firms should be identified and included as part of a firm’s overall management team in its business plan. The most effective way to illustrate how a company will be structured and the lines of authority and accountability that will be in place is to include an organizational chart in the business plan.

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Chapter Outline XI. XII.

XIII.

XIV. XV. XVI.

Introduction Management Team a. Management Team Personnel b. Management Team Ownership and Compensation c. Common Mistakes to Avoid Board of Directors a. Provide Guidance b. Lend Legitimacy Board of Advisors Other Professionals Company Structure

Chapter Notes I.

Introduction  Many investors and others look first at the executive summary, and then go directly to the management team section to assess the strength of the people starting the firm  There is a prevalent belief that unless a proposed new venture has a strong management team, little else matters  It’s often not the idea or market that wins funding among competing plans, but the perception that one management team is better prepared to execute their idea than the others  Investors tend to evaluate management teams in the context of the type of business they’re proposing and the type of funding or financing they’re seeking  The best candidate for investment resides in Box 2 of the 2 x 2 matrix—an untested idea and a tested management team  The management team section should be crisp and to the point, with material such as resumes of key employees placed in an appendix  The way your management team is assembled provides an indication of the extent to which you’re open to advice and you’re able to generate enthusiasm for your firm  Clearly describe how your team will evolve; most new ventures will have gaps in their management teams at the business plan stage  Describe where the gaps are and how they’ll be filled; for example, if the start-up can’t afford to hire a marketing person during its product development state, that’s understandable, but evidence should be provided showing where the firm is getting access to marketing expertise  Leaving issues like these unaddressed or unresolved gives the impression that the founders don’t really know what they’re doing and erodes credibility

II.

Management Team  The management team of a new firm typically consists of the founder and a handful of key management personnel

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The description should be largely factual but should be presented in a way that makes it easy to visualize where the firm is today and where it plans to be in the foreseeable future in regard to key management team personnel Indicate the name or names of the founders, how many employees the company has, where the major gaps are, and how quickly the company will be adding personnel The three major parts to this section are management team personnel, management team ownership and compensation, and common mistakes to avoid a.

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Management Team Personnel o A brief profile of each member of the management team should be provided starting with the founder or founders  Title of the position  Duties and responsibilities of the position  Previous industry and related experience  Previous successes  Education background o Certain attributes of a management team should also be highlighted if they apply in your case  Team members who’ve worked together before are preferred because it usually means that they get along personally and trust one another  The skills and ability of the members of the team should complement one another rather than reinforce a single skill or competency The next step in describing the management team is to identify gaps that

exist Complete a management team skill profile grid, indicating which skills are satisfied by each management team member The grid illustrates the skills or competencies that currently have no coverage and roughly the number of people who need to be hired b.

Management Team Ownership and Compensation o You must also fully disclose the ownership structure of the new venture and the compensation of the members of the management team o List each owner, his percent ownership in the company, and his base compensation o An options pool is an inventory of company stock that is set aside for future employees o Attracting high-quality people to a start-up often necessitates the granting of stock options as an incentive form of compensation o Finally, it should be clear how the money for the firm has been raised so far

Common Mistakes to Avoid o Do not place unqualified friends or family members in key management positions o Don’t assume that previous success in other industries automatically translates to your industry Copyright © 2015 Pearson Education, Inc.

lxxxi Don’t adopt a ―one-man team‖ philosophy Don’t hire top managers who share no ownership in the firm Be sure to disclose management team skill or competency gaps Don’t use vague or unclear language to discuss plans for filling the skill or competency gaps that are disclosed

o o o o

III.

Board of Directors  If a new venture organizes as a corporation, it is legally required to have a board of directors, which is a panel of individuals elected by the corporation’s shareholders to oversee the management of the firm  Technically a board of directors has three responsibilities: (1) appoint the firm’s officers, (2) declare dividends, and (3) oversee the affairs of the corporation  An inside director is a person who is also an officer of the firm  An outside director is someone who is not employed by the firm  If you include this section in your plan, you should list your board members and provide a brief bio for each member a.

Provide Guidance o Providing guidance and support to the managers of the firm is the most useful role of the board of directors o Boards can also help fill competency gaps within the company o If a firm gets investment capital, the investor will normally occupy a seat on its board of directors

Lend Legitimacy o Providing legitimacy for a firm is another important function of a board of directors o It is assumed that a high-quality individual would be reluctant to serve on a board of a low-quality firm; this individual’s presence on the board is known as ―signaling‖ that the company has the potential to be successful o Investors like to see management teams, including the board of directors, that have people with enough clout to get their foot in the door with potential suppliers and customers o If a company doesn’t currently have a board of directors, it may be prudent to indicate that the firm anticipates having a board of directors at some point in the future

IV.

Board of Advisors  A board of advisors is a panel of experts asked by a firm’s managers to provide counsel and advice on an ongoing basis  Many people are more willing to serve on a board of advisors than on a board of directors because it requires less time and no legal liability is involved  Most boards of advisors have between 5 and 15 members  Having a board of advisors can make your start-up stand out because, although having a board of advisors is widely recommended, most start-ups do not have one

Other Professionals

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VI.

At times other professionals, such as attorneys, bankers, investors, and business consultants, assume important roles in a new venture’s success The objective is not only to disclose who you’re working with but also to assure the readers of your plan that you’re getting good-quality advice Consultants, individuals who give professional or expert advice, make up an important source of advice for many start-up firms Unpaid consultants include organizations such as the Small Business Development Center and SCORE Some start-ups use the services of consulting companies such as Bain & Company and Accenture, but usually on a limited basis

Company Structure  Even if you are a small firm, you should outline how the company is currently structured and how it will be structured as it grows  Company structure is a ―nuts-and-bolts‖ type of issue that deals with the inner workings of a firm  The most effective way to illustrate a company’s structure and lines of authority and accountability is to include an organizational chart in the plan  An organizational chart is a graphic representation of how authority and responsibility are distributed within the company  Companies are generally organized along functional, product, or geographical lines  There may be some unfilled boxes on the organizational chart, consistent with the ―gaps‖ in management personnel shown in the skill profile  If your firm has more than one founder, you should comment on the specific role that each founder will take on as the firm moves forward  Some business plans complement their discussion of company structure with a brief analysis of how the firm will be managed from a leadership, motivation, and corporate culture point of view

Review Questions 1.

Why is the management team and company structure section referred to as a pivotal chapter in a business plan? Answer: Many investors and others who read business plans look first at the executive summary, and then go directly to the management team section to assess the strengths of the people who will be starting the firm.

To what degree does the way a firm assembles its management team provide an indication of the extent to which the managers of the firm are open to advice and are able to generate enthusiasm for their firm? Copyright © 2015 Pearson Education, Inc.

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Answer: When a firm receives advice from several unpaid consultants, it shows that the people behind the firm are willing to share power and are able to garner support for their business ideas. 3.

Why is it important to show how a company will evolve in regard to the composition of its management team? Answer: You should describe the management team in terms that are largely factual but should be presented in a way that makes it easy to visualize where the firm is today and where it plans to be in the foreseeable future in regard to key management personnel. Indicate where the major gaps are and how quickly the company will be adding personnel.

Why do investors tend to prefer management teams who have worked together before? Answer: Many investors prefer team members who’ve worked together before. The thinking is that if people have worked together and decided to partner to start a new firm, they get along personally and trust one another. This scenario helps relieve a persistent worry—that the initial managers of a firm won’t get along with one another.

Describe what a management team skill profile is and how it is set up. Answer: A management team skill profile is a grid that lists the major skills needed in a firm on the horizontal axis (marketing, finance, manufacturing, IT, etc.) and the current members of the management team on the vertical axis. The grid is completed by indicating which skills are satisfied by each management team member. The skills with no coverage represent gaps in the management team.

Why is it important to fully disclose the ownership structure of a new venture and the compensation of the members of its management team in the business plan? Answer: Potential investors should be able to ascertain the ownership structure of the firm. List each owner, his or her percent ownership in the company, and any options pool of stock. Investors will want to be reassured that the founders understand the importance of an options pool as a tool to attract high-quality people.

What are some of the common mistakes to avoid in putting together an initial management team? Answer: The common mistakes to avoid when putting together your initial management team and writing your business plan include placing unqualified friends or family members in key management positions, assuming that previous success in other industries automatically translates to your industry, presenting a one-man team philosophy, hiring top managers who share no ownership in the firm, not disclosing management team skill or competency gaps, and vague or unclear plans for filling the skill or competency gaps that are disclosed or clearly exist.

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Answer: A board of directors is a panel of individuals who are elected by a corporation’s shareholders to oversee the management of the firm. Many firms have active boards of directors that provide guidance and lend legitimacy to the firm. 9.

What is a board of advisors? What role does a board of advisors play in the management of a firm? Answer: An advisory board is a panel of experts who are asked by a firm’s managers to provide counsel and advice on an ongoing basis.

10.

Describe the purpose of an organizational chart. Answer: The most effective way to illustrate how a company will be structured and the lines of authority and accountability that will be in place is to include an organizational chart in the business plan.

Application Questions 1.

Steve Perkins developed and launched a successful smartphone app that helps people manage their finances. He just received funding and plans to develop several additional smartphone apps that deal with personal finances, investing, and planning for retirement. Steve will need to hire several employees to ramp up his company and is concerned about making smart hiring decisions. Up to this point, he’s been his company’s only employee. Steve’s question to you is, ―What are the factors I should be thinking about in terms of building my management team and roster of employees?‖ Answer: For his management team, Steve should be looking for individuals who possess complimentary rather than redundant skills, share priorities and work habits that are in sync, have common goals and aspirations, and finally, have a Founder’s Agreement.

Melanie Ford has read several books on how to write a business plan. All of the books stressed the importance of the management team section, stressing the number one thing that investors focus on is the strength of a new venture’s management team. Melanie can’t figure out why this is true. Recently, she wrote a letter to the editor of Inc. magazine and asked, ―Why do investors put so much stock in the portion of a business plan that deals with the strength of the management team? If a start-up’s product doesn’t do well in the marketplace, what’s the value of having a top notch management team? If you were the editor of Inc., how would you reply to Melanie’s letter? Answer: The management team is often the thing that wins funding among competing plans versus the market or the product idea. This is based on the prevalent belief that unless a proposed new venture has a strong management team, little else matters. A strong management team, including the board of directors, provides oversight and can create entrée with suppliers, investors, and clients. Copyright © 2015 Pearson Education, Inc.

lxxxv 3.

If you were one of the founders of Prime Adult Fitness, make a list of the activities that your 4-member general advisory board and your 10-member customer advisory board could help you with. Answer: Student responses will vary.

Imagine you are starting a firm with two partners, and you are all college seniors with limited work experience. You don’t have impressive credentials to include in the management team section of your business plan. How can you construct this section of your plan, and the company itself, in a way that reassures the readers of the plan that you know what you’re doing and will get the advice you need to launch a successful company? Answer: Student responses will vary but should include discussions about creating a strong board of directors, board of advisors, and utilizing a competent crew of other professionals to provide guidance and expertise in key areas.

Kim Smith, David Whitten, and Shelly Andersen are proposing to launch a company that will help college students streamline the process of applying for student loans and other forms of financial aid. They submitted their business plan to an investor, who just sent them a text that read, ―I’m going through the Management Team section of your business plan, and don’t see an organization chart. Can you submit it to me?‖ They replied to the text by saying, ―We haven’t fleshed out a formal organization chart yet. Once we launch the firm, we’ll sort out what our specific roles will be and develop the organization chart.‖ To what degree do you think this reply will satisfy the investor? Why is it important to have a formal organization chart agreed upon and in place prior to the launch of a business? Answer: Investors want to see that the internal structure of a company makes sense and that the lines of communication and accountability are clear. A description of your company’s structure also reassures the people who read the plan that you know how to translate your business idea into a functioning firm. The chart should show what the business looks like today and what it intends to become in the short-term or intermediate-term future. A frequent source of tension in new ventures, particularly if two or more founders start out as ―equals,‖ is a failure to delineate the specific roles they will fill.

Additional Activities 1.

Famous Founders

Purpose: to reveal the background of the founders of famous entrepreneurial ventures.

lxxxvi This activity works well as an icebreaker to introduce this chapter, or can be used at the conclusion of your lecture on the management team. Before class, choose one or two well-known entrepreneurs. For example, Steve Jobs and Steven Wozniak (founders of Apple Computer) or Michael Dell and Bill Gates. Do a bit of Internet research to develop a brief biography of each person. Provide copies of these bios to your students. In class form the students into discussion groups of four to six people. Ask them to review the bios of these famous founders and answer the following questions: o What level of, and kind of, education did they have? o What kinds of industry experience did they have prior to starting their famous business? o What kinds of previous entrepreneurial experience did they have? o On a scale of 1 to 5 (5 being high), how passionate were they about their businesses? Debrief this activity by using the whip technique. Make a statement such as, ―One thing that increases the success of a new venture team is ______.‖ Then ask for a volunteer to quickly fill in the blank with one word. That student then calls on another student to fill in the same blank with another word. Continue this process until you are satisfied that all of the key concepts have been suggested. 2.

Green Light Signals

Purpose: to identify individuals to add to a board of directors who will ―signal‖ the legitimacy of a high-potential venture to investors. Prior to class, visit the website of a well-known company such as Apple Computers. Find the list of the members of their board of directors. After lecturing on the types of individuals who should be invited to serve on a board of directors, show your students the list of individuals actually serving on the board of the well-known company you researched. For example in 2007, Apple’s board of directors included the former chairman and CEO of Intuit, the chairman and CEO of J. Crew, Al Gore Jr., the CEO of Google, and other very high-profile individuals. Debrief this activity by asking some or all of the following questions: o What does each individual’s presence on the board indicates to a potential investor? o Who they believe would signal the legitimacy of a well-known local business? o Finally, encourage students to be creative and really stretch the boundaries of their own personal networks. For example, I once had a student whose uncle was very good friends with Donald Trump!

The Organization Chart

Purpose: to practice drawing an organization chart. After lecturing on company structure, tell the students that it is now their turn to draw an organization chart. Identify a well-known local small business, and provide the students with the job titles of positions most likely to be employed by the business. Ask the students to use the job

lxxxvii titles to draw the organization chart. Then ask students to identify tasks that could be accomplished by a consultant, accountant, or other advisor.

Chapter 9 Operations Plan and Product (or Service) Development Plan Key Words Operations plan section—outlines how your business will be run and how your product or service will be produced Operations flow diagram—shows the key steps in the production of a product or the delivery of a service OEM (original equipment manufacturer)—a company that sells parts to larger companies that use the parts in products they sell Prototype—the first physical depiction of a new product Virtual prototype—computer-generated 3D image of an idea Usability testing—a form of product/service feasibility analysis that measures a product’s ease of use and the user’s perception of the experience Intellectual property—any product of human intellect that is intangible but has value in the marketplace Trade secret—any formula, pattern, physical device, idea, process, or other information that provides the owners of the information with a competitive advantage in the marketplace Economic espionage act—federal law passed in 1996 that criminalizes the theft of trade secrets Provisional patent application—this provision of the law allows a start-up to stake a claim to a particular invention for up to a year while it’s deciding whether to move forward with a complete patent application

Chapter Overview This chapter is divided into two parts. The first part of the chapter describes the operations section of a business plan, which focuses on how you will produce your product or service and run your business. The second half of the chapter focuses on the status of the development of a product or service.

Chapter Summary 1.

This chapter is divided into two parts. The first part of the chapter describes the operations section of a business plan, which focuses on how you will produce your product or service and run your business. This is an important chapter that should appear in every business plan. The section half of the chapter focuses on a topic that is signaled out in some business plans and not in others—the status of the development of a product or service. The most important rule of thumb for writing the operations and the product design and development sections of your business plan is to focus on the aspects of each of these areas that are either essential to the success of your business or sets you apart from your competitors. Routine topics should be dealt with lightly and quickly. Copyright © 2015 Pearson Education, Inc.

lxxxviii 3.

The operations plan section of the business plan outlines how your business will be run and how your product or service will be produced. The topics that are generally incorporated include operating model and procedures, business location, facilities and equipment, and operations strategy and plans. Other topics may be included depending on the nature of the business. A useful way to illustrate how a product or service will be produced is to include an operations flow diagram in your business plan. An operations flow diagram shows the key steps in the production of a product or the delivery of a service. Although the operations flow diagram explains how a product or service is produced, there are other issues that are relevant for this section. These issues include an explanation of how your inventory will be stored and how frequently it will be turned over, a description of the length and nature of your product’s or service’s production cycle, an explanation of where bottlenecks are likely to occur in your manufacturing process or service delivery and how these will be handled, an explanation of how seasonal production loads will be handled without service disruption, an explanation of how your quality control will be managed, and an explanation of how your after-sale service, if applicable, will be handled. This product design and development section of your business plan has four parts: development status and tasks, difficulties and risks, costs, and intellectual property. Many seemingly promising start-ups never get off the ground because their product development efforts stall or the actual development of a product or service turned out to be more difficult than anticipated. Most products follow a logical path of development that includes product conception, prototyping, initial production, and full production. Depending on the sophistication of your product or service development process, products and services typically pass tests that probe their performance and technical merits as they pass from one step in the development process to the next. You should explain the process you followed to move your product from one stage to the next. If you are a very early stage firm and have only an idea, you should carefully explain how a prototype of your product will be made. A prototype is the first physical depiction of a new product. One sticky point in business plans is to decide how much to reveal about a company’s potential intellectual property, knowing that the plan will be read by people who ultimately won’t be involved with the venture. While a company wants the readers of its business plan to fully grasp its potential, the fear is that by revealing too much, a startup risks losing the confidential nature of its plans, particularly as it relates to products that may be patented and trade names that will eventually be legally protected. There is no good answer to this conundrum. It is simply a judgment call. The vast majority of business ideas are not unique enough that this issue becomes a problem, but that isn’t always the case.

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XIX.

d. Operations Strategy and Plans Product (or Service) Development Plan a. Development Status and Tasks b. Challenges and Risks c. Costs d. Intellectual Property

Chapter Notes I.

Introduction  If you are developing a non-existent product, you’ll need to include a section that describes the design and development of the product  If you’re opening a more traditional business, then you don’t normally need a section on product design and development; simply product-relevant information in the operations section  Your readers want an overall sense of how the business will be developed but generally are not looking for detailed explanations  The most important rule of thumb is to focus on the aspects that are either essential to the success of your business or that set you apart from competitors

II.

Operations Plan  The operations plan section of the business plan outlines how your business will be run and how your product or service will be produced  The topics that are generally included are operating model and procedures, business location, facilities and equipment, and operations strategy and plans a. Operations Model and Procedure o The primary objective of this section is to show that you have a firm grasp on the operational details of launching and running your business o In many instances, the operations section will not be carefully dissected, but in some instances, the information that’s included represents make-or-break issues for a firm o You can frame your operations discussion in terms of ―back stage,‖ or behind the scenes activities, and ―front stage,‖ or what the customer sees and experiences o Some business plans frame the discussion of their operations in the context of a ―day in the life of a business‖ o Another useful way to illustrate how a product or service is produced is to include an operations flow diagram o An operations flow diagram shows the key steps in the production of a product or the delivery of a service o Some issues need to be singled out and discussed in more detail in this section:  An explanation of how your inventory will be stored and how frequently it will be turned over  A description of the length and nature of your product’s production cycle Copyright © 2015 Pearson Education, Inc.

xc    

An explanation of where bottlenecks are likely to occur and how you will handle them An explanation of how you will handle seasonal production loads An explanation of how your quality control will be managed An explanation of how your after-sale service, if applicable, will be handled

Business Location o This section describes the geographic location of the business o There are several specific instances in which a business’s location is a critical factoring its capability to operate efficiently and effectively:  Proximity to qualified labor  Closeness to suppliers  Access to transportation, such as a major airport or an interstate highway  Access to international shipping alternatives  Proximity to customers with a profile conducive to a firm’s business  Access to favorable state and local tax rates  Access to economic incentives for locating in a certain area  Proximity to high-quality community in terms of public education, recreational opportunities, health care, and the arts to attract a high-quality workforce o You should describe the rationale for your location in this portion of your business plan

Facilities and Equipment o You should list your most important facilities and equipment and briefly describe how they will be (or have been) acquired o If you will be producing your own product, you should describe the production facility that you have or are looking for o This is particularly important for a business-to-business start-up, especially if you are an OEM (original equipment manufacturer) o You may also want to comment on the degree to which you will hold foreign partners accountable for the working conditions in their factories and for their environmental standards o If your business is projecting fairly rapid growth, you should comment on how you’ll be able to grow within your existing facilities or how you plan to transition from your existing facility to a larger one

Operations Strategy and Plans o This section deals with strategic and longer term issues pertaining to your operations strategy

xci o o o

III.

An important issue that is normally covered is the portion of your production process that you’ll perform in house as opposed to the activities that will be done by others Although it sounds simple, the task of actually finding reliable partners and managing the operations flow can be complex It may be helpful to include a sentence or two in this part of your plan that clearly makes the link between your business strategy and your operations strategy

Product (or Service) Development Plan  Many seemingly promising start-ups never get off the ground because their product development efforts stall or the actual development of a product or service turns out to be more difficult than anticipated  A start-up must have a credible plan for ramping up the production of a product to satisfy the sales estimates in its financial projections a. Development Status and Tasks o Most products follow a logical path of development that includes product competition, prototyping, initial production, and full production o Depending on the sophistication of your product- or servicedevelopment process, products are assessed for their performance and technical merits as they pass from one step in the development process to the next o You should describe the point that your product or service is at and provide a timeline that describes the remaining steps o If you have involved prospective customers in testing early versions of your product and services, you should briefly comment on the process you’ve used and the results to date o If you are in the very early stages and have only an idea, you should explain how a prototype will be made o In some instances, a computer-generated, virtual prototype, which is less expensive than a physical prototype, is sufficient o There is typically a direct correlation between how far you are from having an actual product or service that can be sold in quantity to how risky your business is perceived to be o One nice touch that dresses up a business plan is to provide a picture of your product if it exists or an artist’s rendition of what the product (or service setting) will look like after it’s developed b.

Challenges and Risks o You should be very candid and transparent in identifying any major anticipated design and development challenges (and risks) for two reasons:  Your reader will anticipate that challenges and risks exist and will want to know what they are  Your reader will want to see evidence that you are aware of the risks and challenges that exist o You should discuss the possible impact of challenges on the development of your product, the costs involved, and the timeline for bringing your product or service to market Copyright © 2015 Pearson Education, Inc.

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Costs o This section should provide a budget for the remaining design and development work that needs to be done to bring your product or service to market o The budget should include the costs of labor, material, consulting fees, prototyping, usability testing, and so on o In most cases, exceeding your design and development budget will be one of the risks disclosed in the challenges and risks section

Intellectual Property o This section should describe any patents, trademarks, copyrights, or trade secrets that you have secured or plan to secure o If you have not taken action on intellectual property issues yet, you should get legal advice so you can discuss your plans in this area o Intellectual property is any product of human intellect that is intangible but has value in the marketplace o A trade secret is any formula, pattern, physical device, idea, process, or other information that provides the owners of the information with a competitive advantage o The federal Economic Espionage Act criminalizes the theft of trade secrets o The primary rule of thumb for deciding if intellectual property should be protected is to determine whether it’s related to a firm’s competitive advantage o Although trademarks and copyrights can be obtained fairly inexpensively, patents are expensive to obtain, which poses a challenge for many start-ups o A provisional patent application allows a start-up to stake a claim to a particular invention for up to a year while it’s deciding whether to move forward with a complete patent application o One sticky point in business plans is to decide how much to reveal about a company’s potential intellectual property

Review Questions 1.

Why is it important to include an operations plan in a business plan? Answer: The operations plan section of the business plan outlines how your business will be run and how your product or service will be produced. The topics that are generally incorporated include: operating model and procedures, business location, facilities and equipment, and operations strategy and plans. Other topics may be included depending on the nature of the business.

When writing the operations plan and the product (and service) design and development plan sections of a business plan, why is it important to strike a careful balance between adequately describing the topics and not going into too much detail? Copyright © 2015 Pearson Education, Inc.

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Answer: Your readers will want an overall sense of how the business will be run and how your product will be developed, but they generally will not be looking for detailed explanations. 3.

What is the most important rule of thumb for writing the operations and the product design and development sections of your business plan? Answer: The most important rule of thumb for writing the operations and the product design and development sections of your business plan is to focus on the aspects of each of these areas that are either essential to the success of your business or sets you apart from your competitors. Routine topics should be dealt with lightly and quickly.

According to the chapter, there is a vast difference between thinking up a new product idea and actually designing and manufacturing the product. Explain the nature and importance of this difference. Answer: According to Stanley Rich and David Gumpert, authors of Business Plans That Win, there are four distinct categories of companies in terms of how ready their products or services are to being sold. From Level 4—Going Concern, which indicates companies where the product or service has not only been developed, but is being produced and sold to customers who are satisfied to Level 1—A Great Idea, But . . . , which describes a company where there is an idea for a product or service but no movement beyond the idea stage. No prototype of the product exists. Rich and Gumpert state that it’s tough for Level 1 companies to get funding unless they have an exceptionally highly qualified management team or an idea that’s an obvious winner.

What is an operations flow diagram and why is it important? Answer: A useful way to illustrate how a product or service will be produced is to include an operations flow diagram in your business plan. An operations flow diagram shows the key steps in the production of a product or the delivery of a service.

Identify three specific instances in which a business’s location is a critical factor in its ability to operate efficiently and effectively. Answer: Among the possible choices are: proximity to qualified labor, closeness to suppliers, access to transportation, such as major airport or an interstate highway, access to international shipping alternatives, proximity to customers with a profile conducive to a firm’s business, access to favorable state and local tax rate, access to economic incentives for locating in a certain area, and proximity to a high-quality community in terms of public education, recreational opportunities, health care, and the arts to attract a high-quality workforce.

What is a product prototype and why it is important? Answer: If you are a very early stage firm and have only an idea, you should carefully explain how a prototype of your product will be made. A prototype is the first physical depiction of a new product.i

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Answer: Usability testing is a form of product/service feasibility analysis that measures a product’s ease of use and the user’s perception of the experience. These are sometimes called user tests, beta tests, or field trials. Usability testing is particularly important for software and website design. 9.

To what extent should a start-up be candid and transparent regarding the challenges and risks associated with its product development process? Answer: You should be very candid and transparent in identifying any major anticipated design and development challenges (and risks) for two reasons: (1) your reader will anticipate that challenges and risks exist and will want to know what they are and (2) your reader will want to see evidence that you are aware of the risks and challenges that exist.

10.

What are the four types of intellectual property, and why is it important to address intellectual property issues in a business plan? Answer: The four types of intellectual property are patents, trademarks, copyrights, and trade secrets. It’s important to address these issues because intellectual property has value in the marketplace and can constitute a competitive advantage for the firm.

Application Questions 1.

Fitbit (http://www.fitbit.com) is the name of a company that makes a product called the Fitbit Force, which is a wireless-enabled device that measures data such as the number of steps walked, quality of sleep, and other personal metrics. Spend some time looking at Fitbit’s Website to acquaint yourself with its product offerings. What do you think were the major ―operational‖ issues that Fitbit included in its business plan? Answer: Student responses will vary.

Discuss the manner in which a company like Fitbit can use ―operations‖ as a means of gaining a competitive advantage over its competitors. Answer: Student responses will vary.

Imagine that you have invented a new type of backpack for students to carry their books on campus. As part of your business plan, you have decided to ―outsource‖ the actual manufacturing of the backpack to a company in China. Do some research to determine how you would locate a company in China to manufacture your backpack, and what type of arrangement you would likely enter into with this company. How much information should you include in your business plan about the company and your arrangement with them? Answer: Student responses will vary but may include a discussion about the degree to which they will hold foreign partners accountable for the working conditions in their factories and for their environmental standards.

Suppose you were working on a business plan for an upscale men’s clothing store. What factors should you consider in selecting the physical location of the store? How much Copyright © 2015 Pearson Education, Inc.

xcv attention would you devote to this issue in your business plan? Answer: Student responses will vary. 5.

Imagine you’re planning to open a coffee shop named Mountain Fresh Coffee. Your coffee shop will be much like a Starbucks or a Caribou Coffee, and will be located three blocks from the campus of a major Midwestern university. Some of the unique aspects of your coffee shop are as follows: (1) You will only employ people who have a passion for coffee, (2) all the coffee you sell will be fair trade certified, (3) the ambience of your shop will be relaxed and unhurried, and (4) you will give back 10 percent of your aftertax profits to local charities. With these factors in mind, along with your own creativity and business sense, complete both a backstage and front-stage operations model for Mountain Fresh Coffee. Make your operations model as extensive as the one for Prime Adult Fitness shown in the chapter. Answer: Student responses will vary.

Additional Activities 1.

An Amazing Operating Model

Purpose: students will recognize the importance of an operating model on the success of a business. Prior to leading this activity review what’s new at Amazon.com. After lecturing on operating models, ask your students why they think Amazon.com has become so successful. What was Amazon’s only product when the firm first started (books)? Why was Amazon able to grow so rapidly when there were so many retail bookstores already competing in the market? This could be a question for any individual student to answer, or it could be used as a discussion question. Although students’ answers will vary, the correct answer is that Amazon has developed a unique operating model. It is unique because the model allows them to sell a wide variety of products at a very low operating cost. For example: o Instead of humans retrieving items from inventory, Amazon uses robots. Labor costs are dramatically reduced. o Their location costs are much lower as they are not located in expensive shopping malls, but are in warehouses instead. o Amazon has forged strong relationships with vendors, enabling them to enjoy just-in-time inventory management and cooperating marketing efforts, thus reducing operating costs even more. Ask students to identify other businesses with unique operating models. (Dell is another!) 2.

Flowing Pizza

Purpose: students will draft an operations flow diagram.

xcvi After lecturing on an operations flow diagram, tell students that developing such a diagram is not as easy as it sounds. Ask students to recall the last time they went to a pizza restaurant to dine in (not for take-out or delivery). Which restaurant did they go to? For this exercise, identify a restaurant that provides a host/hostess and servers. Ask students to form discussion groups of four to six members. Tell the groups that their task is to develop an operations flow diagram. They will need paper and pencil (not a pen) for this exercise. Instruct them now to close their eyes and visual themselves as customers driving into the parking lot of this restaurant. What do they see in the parking lot? (Answers might include white lines on the pavement, signs on the building, an entrance door, etc.) Tell them to write these down on a piece of paper. Now they should imagine walking through the door of the restaurant. What is the first thing they see or encounter? (Answers should include being greeted by a host or hostess, being seated at a table with chairs, and being provided with a menu.) Ask them what items are on the tables, and what items are on the walls. Again, instruct students to write these items down on their paper. Next, instruct the students to continue visualizing the entire experience of a server bringing them water or drinks, placing their orders, the orders being given to the kitchen employees, what the kitchen employees do with the orders, what tools and equipment is used in the kitchen, and so on all the way up to the time they give their payment to the server or host or hostess at the cash register. They should have a very extensive list of every item and every employee that is involved in the operations of this restaurant. Their last task is to draw a diagram of the flow of operations for this restaurant. While they are working, visit each team to observe and coach them on the process. When everyone is finished, ask each team to share their diagram with the rest of the class. Debrief the exercise by asking, on a scale of 1 to 5 (5 is high) how easy this process was. Your final question is the most important one: How could this restaurant’s operating model be improved to make it operate more efficiently? 3.

Barbeques and Barbies

Purpose: to demonstrate the importance of an operations plan on seasonal businesses. Ask students to think of products or services that experience high and low seasonal impacts. For example, barbeque grills sell very well in late spring and early summer, while toys sell faster in November and December. Challenge students to think of an operations plan for a retailer of barbeque grills that would even out the seasonal sales cycle. For example, the retailer could sell fireplace equipment during the seasons that barbeque grills sell slowly. The conclusion here is that although critical and creative planning is important for all businesses, it is especially important for businesses that operate in seasonal markets. 4.

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Purpose: to determine the extent of the intellectual property of a business. After lecturing on intellectual property, explain that new ventures often do not realize the extent of their intellectual property. Ask students to identify a well-known locally owned business and to identify what intellectual property they believe this business demonstrates. Students will likely list the business’s name and logo, but often that is about all they can think of. Ask students to join discussion teams of four to six, and then brainstorm to identify every item of intellectual property they can. Remind them of the rules of brainstorming (fast and furious, quantity over quality, no criticism, and piggybacking encouraged. After asking them to appoint a scribe, give them a short time limit such as 5 or 10 minutes. What you hope to achieve is a far longer list than just name and logo. If the business is a sports bar, intellectual property might include the color scheme and layout of the exterior and interior of the building, the style of uniforms worn by employees, special recipes used to prepare food, a slogan, special events produced by the establishment, advertisements, slogans, and so on. Explain that every business should conduct this kind of an intellectual property audit at least once a year.

Chapter 10 Financial Projections Key Words Source and use of funds statement—a document that lays out specifically how much money a firm needs (if the intention of the business plan is to raise money), where the money will come from, and what the money will be used for Assumptions sheet—an explanation of the most critical assumptions that your financial statements are based on Pro forma (or projected) financial statements—the heart of the financial section of a business plan; includes the income statement, balance sheet, and cash flow statements Pro forma income statement—reflects the projected results of the operations for a firm for a given period of time Net sales—total sales minus allowances for returned goods and discounts COGS (cost of goods sold)—all the direct costs associated with producing or delivering a product or service, including the material costs and direct labor Operating expenses—include marketing, utilities, and administrative costs not directly related to producing a product or service

xcviii Constant ratio method—a type of forecasting that increases general expense items at the same rate as sales Pro forma balance sheet—a projection of a firm’s assets, liabilities, and owner’s equity at a specific point in time Current assets—includes cash plus items that are readily converted into cash; also includes items such as accounts receivable and inventory Fixed assets—assets used over a longer time frame, such as real estate, buildings, equipment, and furniture Current liabilities—includes obligations that are payable within a year Long-term liabilities—includes notes or loans that are repayable beyond one year Owners’ equity—the equity invested in the business by its owners plus the accumulated earnings reported by the business after paying dividends Working capital—current assets minus its current liabilities Current ratio—equals its projected current assets divided by its projected current liabilities Debt ratio—computed by dividing total debt by total assets Cash flow statements—provides an indication of whether a firm will be able to maintain a sufficient cash balance to get up and running successfully Operating activities—includes net income (or loss), depreciation, and changes in current assets and current liabilities other than cash Investing activities—includes the purchase of, sales of, or investment in fixed assets, such as real estate, equipment, and buildings Financing activities—includes cash raised during the period by borrowing money, making payments on loans, or paying dividends Ratio analysis—a practical way to interpret or make sense of a firm’s historical or pro forma financial statements; ratios are computed by taking numbers out of financial statements and forming ratios with them Profitability ratios—compare the amount of income earned against the resources used to generate it Liquidity ratios—measure the relationship between a company’s short-term assets and its shortterm liabilities Overall financial stability ratios—measures the overall financial stability of a firm

Chapter Overview This chapter covers the final section of a business plan; the pro forma (or projected) financial projections. The chapter consists of six parts that cover the information normally included in the financial section of a business plan: source and use of funds statement, assumptions sheet, income statements, balance sheets, cash flows, and ratio analysis.

Chapter Summary 1.

The final section of a business plan presents a firm’s pro forma financial projections. Having completed the previous sections of the plan, it’s easy to see why the financial projections come last. They take the plans you’ve developed and express them in financial terms. The source and use of funds statement is a document that lays out specifically how much money a firm needs (if the intention of the business plan is to raise money) and what the money will be used for. Copyright © 2015 Pearson Education, Inc.

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8. 9.

An assumptions sheet is an explanation of the most critical assumptions that your financial statements are based on. The pro forma income statement reflects the projected results of the operations for a firm for a given period of time. It records all the projected sales and expenses for the given period and shows whether the firms will be making a profit or experiencing a loss. Pro forma income statements are useful in envisioning a firm’s overall earnings potential and prospective changes from year to year. They don’t, however, provide an indication of a firm’s cash position. Unlike the pro forma income statement, which covers a specific period of time, a pro forma balance sheet is a projection of a firm’s assets, liabilities, and owner’s equity at a specific point in time. Many of the readers of your business plan will consider your pro forma cash flows to be the most valuable of your financial statements. The statements provide an indication of whether a firm will be able to maintain a sufficient cash balance to get up and running successfully. To capture items in an organized manner, the cash flow statement is divided into three activities: operating activities, investing activities, and finance activities. The most practical way to interpret or make sense of a firm’s historical or pro forma financial statements is through ratio analysis. In general, ratios are computed by taking numbers out of financial statements and forming ratios with them. Each ratio has a particular meaning in regard to the potential of a business.

Chapter Outline XX. Introduction XXI. Source and Use of Funds Statement XXII. Assumptions Sheet XXIII. Pro Forma Financial Statements a. Pro Forma Income Statement b. Pro Forma Balance Sheet c. Pro Forma Cash Flow XXIV. Ratio Analysis

Chapter Notes I.

Introduction  The final section of a business plan presents a firm’s pro forma (or projected) financial projections  There are three things to be particularly mindful of as you approach this chapter: o Potential investors reading your plan will be primarily interested in the size of the returns and how quickly a company can grow, whereas bankers are more interested in the predictability and stability of a company’s financial results and how it will minimize risk o Your financial statements show whether your business can get up and running successfully; many businesses represent viable ongoing

II.

III.

IV.

concerns, but the trick is getting them started and through the early period when most start-ups will lose money Most students and entrepreneurs are not familiar with how to complete pro forma financial projections; get help if you need it

Source and Use of Funds Statement  The source and use of funds statement is a document that lays out specifically how much money a firm needs (if the intention of the business plan is to raise money), where the money will come from, and what the money will be used for  The items from the source and use of funds statement normally become the initial assets and liabilities on a firm’s balance sheet  If any of the funds you will be receiving come from an unusual source, you should substantiate the source of funding Assumptions Sheet  An assumptions sheet is an explanation of the most critical assumptions that your financial statements are based on  In many instances, the assumption sheet references earlier portions of the business plan  Although the assumption sheet is only meant to comment on the most critical numbers used to prepare the financial statements, it’s impossible to overemphasize the importance of conveying that your statements are built on good data Pro Forma Financial Statements  The pro forma financial statements are the heart of the financial section of a business plan  If your plan has been built in the manner described in this book, most of the hard work, such as projecting sales and creating a marketing budget, has already been done  A firm’s pro forma financial statements are similar to historical statements except they look forward rather than track the past  Most experts recommend three to five years of statements, with the first two years for the income statement and the cash flow statement completed on a monthly basis  If the company you’re writing your plan for already exists, include three years of historic financial statements a.

Pro Forma Income Statement  The pro forma income statement reflects the projected results of the operations for a firm for a given period of time  It is often referred to as a ―profit and loss‖ because the pro forma income statement records all projected sales and expenses for a given period and shows whether the firm will be making a profit or experiencing a loss  There are three numbers that receive the most attention when evaluating an income statement: net sales, cost of goods sold, and operating expenses  In demonstrating anticipated year-to-year increases in expenses, you can use the constant ratio method, where general expense



items are expected to increase at the same rate as sales if the actual numbers are not known One ratio of particular importance in evaluating a firm’s pro forma income statements is a firm’s projected profit margins, or return on sales (ROS), computed by dividing net income by net sales Pro forma income statements don’t provide an indication of a firm’s cash position; a firm can show excellent sales numbers and still run out of cash despite glowing income statements

Balance Sheet  A pro forma balance sheet is a projection of a firm’s assets, liabilities, and owner’s equity at a specific point in time  Assets are listed in order of their ―liquidity,‖ or the length of time it takes to convert them to cash  Liabilities are listed in the order in which they must be paid  A balance sheet must always ―balance,‖ meaning a firm’s assets must always equal its liabilities plus owner’s equity  The major categories of assets listed on a pro forma balance sheet include current assets, fixed assets, current liabilities, longterm liabilities, and owner’s equity  Balance sheets are somewhat deceiving in that firms spend money on many things that never show up on their balance sheets, intangible assets are not recognized on the balance sheet, and property must be valued at the purchase price instead of the current value  When evaluating a pro forma balance sheet, the two primary questions are whether a firm will have sufficient short-term assets to cover its short-term debts and whether it is financially sound overall  Overall financial soundness is assessed by computing a firm’s overall debt ratio  Debt ratio is computed by dividing total debt by total assets

Cash Flow  Many readers of your business plan will consider your pro forma cash flows to be the most valuable of your financial statements  The cash flow statements provide an indication of whether a firm will be able to maintain a sufficient cash balance to get up and running successfully  To capture items in an organized manner, the cash flow statement is divided into three activities: operating activities, investing activities, and finance activities  It’s important that all of a firm’s pro forma financial statements be prepared as accurately and realistically as possible  Another financial instrument that is often used is the break-even analysis

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The most practical way to interpret a firm’s historical or pro forma financial statements is through ratio analysis Your readers will instantly recognize the general picture that a particular ratio conveys A valuable use of a firm’s ratios is to compare them to industry norms The three most common categories of financial ratios are profitability ratios, liquidity ratios, and overall financial stability ratios

Review Questions 1.

Why is the financial plan typically one of the last sections in a business plan? Answer: The final section of a business plan presents a firm’s pro forma financial projections. Having completed the previous sections of the plan, it’s easy to see why the financial projections come last. They take the plans you’ve developed and express them in financial terms.

What is the purpose of a source and use of funds statement? Answer: The source and use of funds statement is a document that lays out specifically how much money a firm needs (if the intention of the business plan is to raise money) and what the money will be used for.

What is the purpose of an assumptions sheet? Answer: An assumptions sheet is an explanation of the most critical assumptions that your financial statements are based on.

Briefly describe the three pro forma financial statements that should be included in a business plan. Answer: Pro forma financial statements include: (1) the income statement, reflecting the projected results of the operations of a firm for a given period of time, (2) balance sheet, projecting a firm’s assets, liabilities, and owner’s equity at a specific point in time, and (3) cash flow statement, which indicates whether a firm will be able to maintain a sufficient cash balance to get up and running successfully.

How is it possible for a firm to show a sizable net income on its income statements and still be running out of cash? Answer: Pro forma income statements are useful in envisioning a firm’s overall earnings potential and prospective changes from year to year. They don’t, however, provide an indication of a firm’s cash position. A firm can show excellent sales numbers, but if the sales accumulate as accounts receivable (or are used to build inventory), a firm can run out of cash despite glowing income statements.

Describe the term ―cost of goods sold (COGS).‖ Answer: COGS (cost of goods sold) is all the direct costs associated with producing or delivering a product or service, including the material costs and direct labor. Copyright © 2015 Pearson Education, Inc.

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Why would a current ratio of 1.1 raise concerns? Answer: Current ratio equals projected current assets divided by projected current liabilities. A current ratio of 1.1 means that a firm will have only $1.10 in current assets for every $1.00 in current debt. This is a very tight number that may cause you to wonder if the firm will be able to meet its current liabilities.

Describe why many people feel that the cash flow statement is the most valuable statement of the three financial statements normally included in a business plan. Answer: Many of the readers of your business plan will consider your pro forma cash flows to be the most valuable of your financial statements. The statements provide an indication of whether a firm will be able to maintain a sufficient cash balance to get up and running successfully.

Describe the purpose of ratio analysis. Answer: The most practical way to interpret or make sense of a firm’s historical or pro forma financial statements is through ratio analysis. In general, ratios are computed by taking numbers out of financial statements and forming ratios with them. Each ratio has a particular meaning in regard to the potential of a business.

10.

Briefly describe at least one profitability ratio, one liquidity ratio, and one overall financial stability ratio. Answer: Student responses will vary. Profitability ratios compare the amount of income earned against the resources used to generate it (e.g., return on assets or return on sales). Liquidity ratios measure the relationship between a company’s short-term assets and its short-term liabilities (e.g., current ratio). Overall financial stability ratios measure the overall financial stability of a firm (e.g., debt ratio).

Application Questions 1.

Suppose a friend of yours showed you the pro forma income statements for his start-up and exclaimed excitedly that during its first three years of operation his firm will make a net income of $150,000 per year, which is just the amount of money, $450,000, that the firm will need to pay off a three-year loan. Explain to your friend why he might not actually have $600,000 in cash, even though his pro forma income statements say that he will earn that amount of money. Answer: Pro forma income statements don’t provide an indication of a firm’s cash position; a firm can show excellent sales numbers and run out of cash. A firm can show excellent sales numbers, but if the sales accumulate as accounts receivable (or are used to build inventory), it can run out of cash.

Suppose a colleague of yours is gearing up to write a business plan for a business she plans to start. She told you she plans to prepare the financial statements first to get that job out of the way before she tackles the rest of the plan. Explain to your colleague the Copyright © 2015 Pearson Education, Inc.

civ flaw in her approach. Answer: The final section of a business plan presents a firm’s pro forma financial projections. Having completed the previous sections of the plan, it’s easy to see why the financial projections come last. They take the plans you’ve developed and express them in financial terms. You’ll find yourself referring to earlier sections in your business plan frequently while you prepare your financial projections. 3.

An acquaintance of yours is looking to invest in a local restaurant. He has narrowed the possibilities to three restaurants. He has requested and received both historical and pro forma income statements, balance sheets, and statements of cash flow from each of the restaurants. He’s turned to you for advice in terms of how to use the financial statements to assist him in his investment decision. Provide your acquaintance advice on a systematic approach for using the financial statements to aid in his decision. Answer: The most practical way to interpret or make sense of a firm’s historical or pro forma financial statements is through ratio analysis. The three most common categories of financial ratios are profitability ratios, liquidity ratios, and overall financial stability ratios.

You have been invited to speak at a small business growth conference. The title of the speech that you’ve been asked to deliver is ―Be Careful What You Wish For: How Growing Too Fast Can Financially Overwhelm A Company.‖ Write a summary of the points that you’ll make in your speech. Answer: Student responses will vary but could include, among other topics, discussions about forecasting expenses using the constant ratio method, the accumulation of receivables while cash remains low and an unhealthy debt ratio if loans are secured to finance rapid growth. Another issue of concern is the cost of hiring new employees without the cash to pay them.

Imagine that you are an investor and that you’re leafing through the business plan of a startup that has attracted your interest. You’ve reached the financial projections section of the plan, glance at your watch, and realize you only have five minutes to make an assessment. List the items you would look at and the order in which you would look at them. Justify why each of these items would be a priority in the five minutes you have available. Answer: Student responses will vary.

Additional Activities 1.

You Know More Than You Think

Purpose: to establish that most students have already gained a significant amount of knowledge and experience about financial management. This activity is a good icebreaker to begin this chapter. Ask students to individually write a list of tasks that they currently perform to manage their personal financial lives. For example, many Copyright © 2015 Pearson Education, Inc.

cv students have a job, a checking account, and a credit card. What are some of the tasks that they perform to maintain the income necessary to cover their expenses and how do they utilize a checking account and credit card? Set a specific time limit of perhaps 5 minutes for students to individually create their lists. Then ask all students to share their lists with as many other students as possible. Again, set a specific time limit, such as 10 minutes. When time is up, ask everyone to sit down, then ask the following questions to debrief the activity: o Does anyone lay out specifically how much money you need to live on and where the money will come from? (Hint: this is a source and use of funds statement.) o Has anyone listed any critical assumptions that your plan is based on? For example, how critical is it for you to not just keep your job but to also get an annual pay raise? (Hint: this is the assumptions sheet.) o Who has a checking account? Which of the financial statements discussed in this chapter is similar to a checking account register? (Hint: this is a simple cash flow statement.)

Strange Words vs. Key Words

Purpose: to stimulate learning and retention of important key terms. This chapter contains more key words than the other chapters, some of which may not be familiar to students. Before class, decide if you want to provide the following ―words‖ in a handout, PowerPoint slide or some other visual aid. You will notice that the vowels and punctuation from each word or phrase have been removed, leaving only the consonants with no spaces in between. Provide the list on the next page to students at the beginning of class, and ask them to identify the relevant term from the course material as you progress through your class. Consider offering some prize or recognition to those who score the highest or finish first with all items correct, as an incentive for increasing students’ motivation.

Strange Words srcdsffndssttmnt

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Key Words source and use of funds statement pro forma financial statements cost of goods sold

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constant ratio method

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current assets current liabilities

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Key Words assumptions sheet net sales operating expenses pro formal balance sheet fixed assets long-term liabilities

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owner’s equity current ratio cash flow statements

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investing activities

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ratio analysis

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liquidity ratios

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working capital debt ratio operating activities financing activities profitability ratios overall financial stability ratios

Debrief this activity by asking students: o What was your reaction to this method of learning? o Did receiving the strange words in advance help or hinder your learning them?

Matching Review

Purpose: to assess the degree of retention of Key Words. These are listed beginning of page 119 in this Instructor Manual. To reinforce recognition and understanding of major Key Words at the end of the chapter. Create a master list of the definitions of each of the Key Words from this chapter on one set of pages and a numbered list of the actual Key Words on another set of pages. (The terms, of course, should be in scrambled order—different from definitions.) Divide the class into discussion teams of two to five persons, and give each team a set of materials (Key Words, and definitions) to work with. Set a time limit for the exercise. Score each group on the number of correctly matched Key Words they identify as a group within the time period allotted to them. Provide prizes or special recognition to the winning team. Debrief the exercise by asking students these questions: o Which Key Words gave your group the greatest difficulty? Why? o Which Key Words do you still need to have clarified for you?

Chapter 11 Presenting the Plan with Confidence Key Words No Key Words for Chapter 11

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Chapter Overview This chapter provides a primer on making an effective business plan presentation. This chapter contains two sections. The first section focuses on preparing for and making an effective presentation. The second section of the chapter focuses on the content of the presentation and includes a sample 12-slide PowerPoint presentation.

Chapter Summary 1.

2. 3.

4. 5.

7. 8. 9.

10.

If your business plan piques the interest of an investor or banker, or you enter it into a business plan competition, you’ll normally be asked to make a verbal presentation of the plan. On these occasions, you’ll want to be prepared to present the plan with confidence and poise. Most of us do not routinely make verbal presentations, so careful planning and practice pay off. The first set of issues to think about after you’ve been asked to make a verbal presentation of your business plan is how to prepare for the task and how to deliver an effective presentation. How you present yourself and the manner in which you interact with the people you will be presenting to, makes as much difference as the plan itself. You should make sure to know how much time you have to make your presentation and plan accordingly. The number one rule in making a presentation is to follow the rules. You should dress appropriately for a presentation. If you’re unsure of what to wear, call the receptionist at the firm at which you’ll be presenting and ask about attire. If that route isn’t practical, it is always better to dress up, by wearing formal business attire, than it is to dress down. It’s important to practice your presentation. Many experienced entrepreneurs practice their presentations several times in front of colleagues and others to time the presentation and get feedback. It’s also a good idea to watch other people present to get a sense of what works and what doesn’t work. A strong case can be made for involving as many of the members of your team as possible in a business plan presentation. Your goal, during a business plan presentation, is to not only educate your audience about your idea, but also to fire them up (to inspire). An important component of putting together an effective business plan presentation is to determine the content to present. Obviously, you can’t convey everything that’s in a 25to 35-page business plan in a 20- to 30-minute presentation. As a result, you have to focus on the parts of the plan that are the most important to your audience. The 12 slides in the mock business plan presentation in the chapter include: overview, the problem, the solution, opportunity and target market, technology, competition, marketing and sales, management team, financial projections, current status, financing sought, and summary.

cviii b. Delivering an Effective Presentation XXVII. Preparing the Content of an Effective Business Plan Presentation XXVIII. Sample Business Plan Presentation a. Company Name/Logo b. Slide 1—Overview c. Slide 2—The Problem d. Slide 3—The Solution e. Slide 4—Opportunity and Target Market f. Slide 5—Technology g. Slide 6—Competition h. Slide 7—Marketing and Sales i. Slide 8—Management Team j. Slide 9—Financial Projections k. Slide 10—Current Status l. Slide 11—Financing Sought m. Slide 12—Summary

Chapter Notes I.

Introduction  If your plan piques the interest of an investor, or you enter it into a business plan competition, you’ll be asked to make a verbal presentation of the plan

II.

Preparing for and Delivering an Effective Business Plan Presentation  As you present your plan, your audience will not only be judging your plan, but they will also be judging you (and your team) a.

Preparing for the Presentation o The initial task is to find out as much as you can about the people you’ll be presenting to o If you can tie the business you’re proposing into other activities that the people you’re meeting are involved with, they may see more value in supporting your efforts o Any type of common ground you can find with your audience, such as having the same college or university affiliation or a similar hobby, helps break the ice and build rapport o As long as you come across as sincere, people normally consider it a compliment that you went to the trouble of learning about their backgrounds o Make sure you know how much time you have and plan accordingly o Dress appropriately; if you’re unsure, dress up rather than down o Have business cards ready to distribute o Practice your presentation Copyright © 2015 Pearson Education, Inc.

cix o

III.

Firms that are planning to launch an IPO (initial public offering) are taken by their investment bank on a ―road show,‖ a whirlwind tour that consists of meetings in key cities where the firm presents its business plan to groups of investors Find out as much as you can about the venue you’ll be presenting in

Delivering an Effective Presentation o The first thing to consider is who will do the presenting o If you’re part of a team, there is a strong case for involving as many team members as possible; it shows that your team members work well together o Considering the proper role of PowerPoint slides is a place where many presenters miss the mark o The slides should provide an overall context and punctuate your remarks o Your PowerPoint slides should be brief and contain only major themes and supporting points o Your audience should spend the majority of their time listening to you rather than reading your slides o Some experts recommend a 6-6-6 rule when drafting slides: 6 words per bullet, 6 bullets per page, and no more than 6 text slides in a row before a visual break (a slide that includes graphs, tables, or illustrations) o A maximum of 12 PowerPoint slides in a 20- to 30-minute presentation o Make your presentation interesting, upbeat, and heartfelt (to the degree appropriate and fitting):  Tell a personal story or anecdote  Use humor  Show passion through hand gestures and excitement in your voice  Involve the audience by asking for a show of hands on key points  Demonstrate a prototype of the product o It’s important to understand that your overarching goal is not only to educate your audience about your idea, but also to fire them up (to inspire)

Preparing the Content of an Effective Business Plan Presentation  The presentation has little to no chance of succeeding if the content is poorly thought out or important elements are missing  The single biggest mistake that people make in putting together a business plan presentation is focusing on areas that excite them most, rather than the areas that will help their audience make a decision  You’ll need to anticipate what the ―hot-button‖ issue is for your audience and structure your presentation accordingly  Many experts figure two minutes per slide (on average) so this number works well for a 20- to 30-minute presentation

cx IV.

Sample Business Plan Presentation a. Company Name/Logo o Slide should be sharp and uncluttered and include contact information for at least one of the founders b. Slide 1—Overview o An overview of your business and its potential o If one fact about your business is particularly compelling, tell it here c. Slide 2—The Problem o It’s best to talk first about the problem, and then present your company as the solution to the problem d. Slide 3—The Solution o Present your business as the solution to the problem o Talk about how much difference your business will make in the lives of your customers e. Slide 4—Opportunity and Target Market o Articulate your specific target market o Talk specifically about trends that are providing your market momentum f. Slide 5—Technology o This slide is optional o Talk about your technology or any unusual aspects of your product or service g. Slide 6—Competition o Lay out your competitive landscape o Display your competitive analysis grid h. Slide 7—Marketing and Sales o Describe your overall marketing strategy o Describe pricing strategy and whether you plan to feature cost-plus pricing or value-based pricing i. Slide 8—Management Team o Your audience will see your management team as a key element in the potential success of your new venture o Explain how the team came together and how their backgrounds are keys to the success of the firm j. Slide 9—Financial Projections o Show a summary of your income projections and cash flow projections for the first three to five years o If the font seems too small, use an additional slide o Know your numbers cold k. Slide 10—Current Status o Describe your firm in the context of the milestones you’ve achieved o Describe how much money the founders, management team, and any early investors have put into the firm l. Slide 11—Financing Sought o This slide lays out specifically how much financing you’re seeking o Be prepared to talk about how much of your firm you’re willing to give up if you’re presenting to equity investors m. Slide 12—Summary o Bring the presentation to a close o Summarize the strongest points (two to three maximum) o Discuss your exit strategy o Solicit feedback Copyright © 2015 Pearson Education, Inc.

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Review Questions 1.

Why is it important to carefully prepare and plan for a business plan presentation? Answer: If the presentation goes well, it can move you closer to obtaining the funding or financing you need. If it doesn’t, it can impede your chances of moving forward and represent a setback in your attempts to get your business off the ground.

What are the most important issues involved with preparing for a business plan presentation? Answer: The first set of issues to think about after you’ve been asked to make a verbal presentation of your business plan is how to go about preparing for the task and how to deliver an effective presentation. The second component of putting together an effective business plan presentation is to determine the content to present.

What is meant by the statement, ―As you present your plan, your audience will not only be judging your plan, but they will also be judging you?‖ Answer: Like it or not, how you present yourself and the manner in which you interact with the people you will be presenting to makes as much difference as the plan itself. You get only one chance to make a good first impression!

Why is it important to know about the people you’ll be presenting your business plan to? Answer: Any type of common ground you can find with your audience, such as having the same college or university affiliation or a similar hobby, helps break the ice and build rapport. As long as you come across as sincere, people normally consider it a compliment that you went to the trouble of learning about their backgrounds.

Why is it important to practice your presentation? Answer: Many experienced entrepreneurs practice their presentations several times in front of colleagues and others to time the presentation and get feedback. It’s also a good idea to watch other people present to get a sense of what works and what doesn’t.

What is the proper role of PowerPoint slides in a business plan presentation? Answer: Considering the proper role of PowerPoint slides is a place where many presenters miss the mark. The slides should provide an overall context and punctuate your remarks. Your PowerPoint slides should be brief and contain only major themes and supporting points. Your audience should spend the majority of its time listening to you rather than reading your slides.

What are the positive aspects of involving as many of the members of a management team as possible in a business plan presentation? Answer: If you tag-team your presentation and it goes well, it shows that your team members work well together, and there is no one member of your team who is so dominant that he or she wants all the attention. It also helps keep the listener attentive Copyright © 2015 Pearson Education, Inc.

cxiii and alert. It varies the pace of the presentation and allows the listener to learn a little bit about each of the individuals involved. 8.

What is meant by the phrase ―death by PowerPoint‖? Answer: All kinds of colorful metaphors are attached to the dangers of trying to fit too many slides into a presentation or making your slides too dense, including ―death by PowerPoint‖ and ―PowerPoint poisoning‖ (coined first by Dilbert).

What is a reasonable number of PowerPoint slides to include in a 20- to 30- minute business plan presentation? Answer: A maximum of 12 PowerPoint slides is recommended in a 20- to 30- minute presentation. Many experts figure two minutes per slide (on average), so this number works well for a 20- to 30-minute presentation.

10.

List the title of the slides included in the mock 12-slide business plan presentation included in the chapter. Answer: Slide 1—Overview, Slide 2—The Problem, Slide 3—The Solution, Slide 4— Opportunity and Target Market, Slide 5—Technology, Slide 6—Competition, Slide 7— Marketing and Sales, Slide 8—Management Team, Slide 9—Financial Projections, Slide 10—Current Status, Slide 11—Financing Sought, and Slide 12—Summary.

Application Questions 1.

You recently agreed to serve as a judge for a business plan competition at the college or university you attend. A week before the presentation, you received an e-mail from the organizer of the competition with some last-minute information. One comment in the email struck you. The organizer of the competition said, ―I think you’ll be really impressed with the research the students have done to validate the markets for their ideas.‖ If this statement is accurate, what type of research would you expect to hear from the student teams that you listen to? Answer: Primary research is vital. Students should prove that they have talked to potential customers, and that these potential customers see the problem the same way the students do. Students could also cite the results from their feasibility analysis and concept tests and cite industry experts or services such as Mintel, Bizminer, and IBISWorld in addition to their own data.

Make a list of 10 mistakes that you could make in a business plan presentation. Next to each mistake, make a brief suggestion for how to avoid the mistake. Answer: Student responses will vary.

Josh Peters, a friend of yours, asked you to sit in on a dry run of his business plan presentation. You know that Josh is looking for $200,000 to launch his venture. At the end of the presentation, you ask Josh why he never mentioned how much money he’s looking for. He replied, ―That’s a point of negotiation. I don’t want to disclose how much I’m looking for or how much of the company I’m willing to give up, until I know how interested someone is in my venture.‖ Discuss the pluses and minuses of Josh’s Copyright © 2015 Pearson Education, Inc.

cxiv approach. Answer: Josh may feel more comfortable in withholding some information, but he should be prepared to talk about how much of the firm he’s willing to give up if he’s presenting to equity investors, or the type of terms he’s looking for if he is trying to obtain a bank loan. Josh should discuss how he plans to use the financing received, and what milestones he’ll be able to accomplish with the money. 4.

Suppose you are in the process of raising capital for your startup. You have been asked by a local angel group to present your business plan at their next meeting. Describe how you would go about preparing for the presentation. Make your answer as complete as possible. Answer: Student responses will vary.

Imagine you’re an investor who is very impressed with a business plan you recently reviewed. The market for the product the business plan is focused on is huge, the founders of the company seemed to have found a real problem that needs to be solved, the management team looks good, and the financial projections are impressive. You just listened to the founders of the firm present the plan, and the presentation was weak at best. The founders seemed poorly organized, the slides weren’t sharp, and they only did a so-so job answering questions. You don’t quite know what to do next. The written plan is impressive, but the presentation was a disappointment. If the investor asked for your advice, what would you tell him? Answer: Student responses will vary but might include discussion of the importance of using the presentation as a sign of how effective a business owner the founder if likely to be.

Additional Activities 1.

Hot Buttons

Purpose: to encourage students to identify the benefits and features potential investors and lenders are seeking in a business plan. This can either be an individual or group discussion. Ask students to turn again to Chapters 2 and 6 of the text. This time you want them to use the concepts of Chapters 2 and 6 to focus on profiling lenders and investors instead of customers. For example: o What environmental trends are lenders and investors concerned about? o What unsolved problems might lenders and investors be experiencing? o What gaps in their loan or investment portfolios exist? o How would they characterize the ―buyer behavior‖ of a typical lender or investor? 2.

First Impressions

Purpose: to impress upon students the importance of planning to make a good first impression. Prior to using this activity in class, collect a variety of photographs, advertisements, business names, and business cards. These props should demonstrate both very good and very bad Copyright © 2015 Pearson Education, Inc.

cxv examples of attire, attitudes, and image choices. You can conduct this activity as an individual exercise, a whole-class exercise, or as a group exercise. Although you may think that it will take a lot of time to accumulate a practical supply of these items, you will actually find that it is quite easy and fast to find what you’re looking for. The first time you conduct this exercise, I recommend that you make this a homework assignment for individual students to find and bring to class the photographs, advertisements, business names, and business cards that demonstrate both very good and very bad examples of attire, attitudes, and image choices. Put students into discussion teams; each team is to select the best example of good choices and the best example of poor choices. Each team then shares its choices with the rest of the class and explains why they chose these particular examples. Once you have accumulated a supply of these props, in future terms you can move directly to putting students into the discussion teams to accomplish the same tasks. 3.

Business Plan Presentations

Purpose: students will apply what they learned in this chapter by actually giving a presentation in class and/or at a business plan competition. Although this exercise is very effective if done by individual students or teams as a class assignment, you can make it even more effective by inviting other faculty members or business people from the community to be in the audience. Students take the assignment very seriously when they know that someone other than just you will be evaluating their content and presentation skills. Prior to the presentations, provide your visitors with information about what the students will be doing. For example, you might provide a copy of the business plan outline, information about the students’ business concepts, the time limits for each presentation, and so forth. Ask these audience members to provide students with a constructive critique at the conclusion of each presentation—what was especially good about the presentation and what needs improvement. If you are using a rubric to grade student presentations, provide the rubric to the visitors, too. After the event, assign students to send handwritten thank-you notes to the visitors. Explain that this is yet another aspect of presenting a professional image to important individuals in the community.

I’ll Invest!

Purpose: to stimulate students’ ability to evaluate business plans and presentations. This is another version of how to conduct student business plan presentations in your classroom. Prior to the first presentation, tell your students that they will choose which of the business plan presentations they would most likely invest in. Audience members assume that they playing the role of wealthy investors and have decided that they will invest some large sum of money

cxvi ($250,000) into the best company they see today. However, students cannot invest any funds into their own business. At the conclusion of each presentation, ask students to rate the business plan and presentation based on the likelihood in which they would invest their own personal fortune. Use a rating scale of 1 to 5, with 5 indicating the highest likelihood of receiving their investment. When all presentations are completed, ask students to write the name of the business they would invest in on a piece of scrap paper, and then turn it in to you. Announce the winner to all with your congratulations.