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Chapter 7 PLAN SECTION 2: COMPANY BACKGROUND AND DESCRIPTION
CHAPTER 7
Plan Section 2: Company Background and Description
Learning without thought is labor lost. Thought without learning is perilous. – CONFUCIUS
THE FIRST SUBSTANTIVE SECTION OF THE BUSINESS PLAN sets the stage so that the reader can gain insight into the background and operation of your company. This section gives context to the mission and vision presented in the Introduction (see Chapter 6), allowing the reader to understand more thoroughly the industry or trade sector of your company and how your company fits into it. Section 2 should provide a comprehensive description of the company, including such things as: ■ The historical development of the company ■ The current and projected business activities of the company ■ The products offered by the company ■ The industry segments and markets in which the company is involved Major customers, competitors, alliances and company management may also be referred to in this section, although these topics will generally be covered in much greater detail later in the business plan.
Historical Development of the Company
Generalizations are difficult to make with regard to the contents of the business plan section that describes the development of the company. At a minimum, however, it is useful to explain how the company was originally formed. For example, in a number of cases involving companies active in the high technology area, the business began when the founders left their previous employers to develop a new technical or product concept that did not fit into the strategic plans of the former employers. Beyond formation, other milestones that might be mentioned, as appropriate, include the following: ■ Receipt of initial financing from investors ■ Recruitment of experienced management personnel ■ Expansion of human resource capabilities in research, manufacturing, sales and finance ■ Product testing and initial sales of goods and services ■ Formalization of supply and distribution arrangements ■ Additional rounds of financing ■ Sales milestones
Current and Projected Business Activities
Obviously, a primary reason for preparing the business plan is to analyze the current and projected business activities of the company. At the outset, you should put together a brief summary of the company’s development and marketing of its products, including information on revenues, expenses, profits, losses and market share for a recent period. In addition, you should list some of the ongoing projects within the company, such as development of new goods or services, upgrades to information technology systems, new plants and sales offices and strategic partnerships under discussion. The idea is to provide the reader with some notion of the company’s current stage of development so that you can explain the next steps in its evolution.
Projected business activities build on the current situation and should hopefully jump out as natural extensions of achieving historical milestones. For example, solid acceptance of one of the company’s products in one market may signal an opportunity to introduce the product into a new market with similar demographics. Similarly, the need to reduce the costs of manufacturing to maintain market share and competitive advantage may dictate a need to look to foreign markets for low-cost labor. Arguments for investing in the projected business activities will be made in other parts of the plan.
Products (Goods & Services)
The business plan should include an extensive description of the principal products of the company in each of the industry segments in which the company is active. The form and content of this description, including the required portfolio analysis of the company’s products and the issues to be considered when adapting products for foreign markets, is considered in detail later in the book. The discussion of products in the general company description should be limited to providing the reader with a good sense of the types of products developed or sold by the company. PRODUCT DEFINITION: In most of the developed world, services have overtaken goods as the mainstays of the economy. Because of that, in the remainder of this book, goods and services will be referred to simply as “products” and only separated into tangible or intangible (goods or services) categories when specifically required. For most of us, the “product” of our labor nowadays is a service!
Customers
The business plan should provide the reader with an understanding of the historical and existing markets for the company’s products. It might summarize the company’s major customer relationships, as well as describe any major outlets for the company’s products. Major customers generally include all customers from which the company has derived a significant amount of revenues in recent years, as well as any other customers that the company considers to be “material” to its future prospects. The description of the company’s customer base will be
expanded in that portion of the business plan that deals with marketing strategies. For a start-up company, this section also would include customers who have signed a memorandum-of-understanding (MOU) and companies that have expressed an interest in the products.
The business plan must describe the competitive advantages and distinctive competencies that the company believes will allow it to achieve its business and financial objectives. This information is especially important when the plan is being circulated to investors presented with multiple business plan opportunities.
Some plans identify advantages and competencies by means of a series of questions designed to show the manner in which the company completes the tasks necessary for it to develop, produce and distribute its products. This exercise, sometimes referred to as “value-chain analysis,” is designed to establish the basis on which the company will compete in the future and, to some extent, to identify areas in which the company’s skills fail to match the expertise of competitors.
In any event, the following questions should be considered and answered as relevant to the particular business: ■ Is the company able to compete based on its strengths in procurement, processing or manufacturing? ■ Is the company able to compete based on its practices with respect to inventories, packaging or production flexibility? ■ Is the company able to compete based on its strengths with respect to sales, distribution, customer service, delivery, promotion, maintenance or field engineering? ■ Is the company able to compete based on the characteristics and capabilities of its products? ■ Is the company able to compete on the basis that its operations are sufficiently flexible as to adapt its products to meet the needs of different customer niches? ■ Is the company able to compete based on its human resources strategies? ■ Is the company able to compete based on its strengths in research and development? ■ Is the company able to compete based on a unique technological advantage, which is either embodied in its product line or is utilized in the course of its manufacturing? ■ Is the company able to compete based on its financial assets or strategic business relationships? ■ Is the company able to compete based on its managerial skills, internal controls or innovative business goals and philosophies?
Once the key components of the relevant value chain for the company’s products are identified, a similar series of questions should be asked for each of its major competitors. Thereafter, the company can choose the basis on which it will compete by reference to the important competitive factors in the industry and specific customer “needs.”
PLAN NOTE: Although a given product may be technically “inferior,” it may flourish because of the exceptional distribution capabilities of the manufacturer. Some companies may be able to attain the lowest cost entry in the marketplace by using low-cost production facilities in an offshore location. In other cases, the company’s unique technology can be utilized to develop new tools or applications for customers to solve their own engineering or development problems.
Industry Sector Analysis
Although the company may have a significant competitive advantage and distinctive competencies, success will be achieved only if the company can adequately assess the potential markets for its products and develop and execute a marketing plan that allows the company to penetrate the market successfully. The process should begin with an analysis of the industries in which the company will be competing.
INDUSTRY STRUCTURE The business plan should provide the reader with the company’s own perception of its industry, its historical evolution and future trends, as well as the role that the company is expected to play within the industry in the next few years.
Accordingly, the company should provide a general overview of each of its industry segments and the various business, commercial and social problems that the industry generally, and the company in particular, are seeking to address in conducting business. With respect to each market-based “problem,” reference should be made to the “solutions” offered by existing products. Any shortcomings should be noted of other solutions that have created opportunities for the company in light of its competitive advantages. PLAN TIP: A health care company might attempt to describe the breadth and severity of particular health problems the company feels will support a market for its products. It should further explain why the company’s products solve the identified problems as opposed to products available from competitors.
Industry analysis becomes more complex when the company is contemplating expansion into foreign markets. Although a number of industries already have become global, unique factors must be recognized in each country. One important distinction is the role that local government might play in industry activities, particularly when the government offers financial support and other benefits to domestic firms confronted with the possibility of competition from multinational businesses.
MARKET ANALYSIS The business plan should thoroughly describe each potential market for the company’s products. This analysis should cover the following: ■ A summary of current size of the market. ■ A forecast of the anticipated growth of the market over the next five to ten years. ■ The chief characteristics of the market. ■ The major types of customers in the market (e.g., large Fortune 500 companies,
small firms, individuals, manufacturers, etc.). ■ The nature of each anticipated application of the products. ■ A review of significant industry trends. ■ A breakdown of each target market by size and volume, the products used, the sophistication of the customers, the amount of innovation (e.g., any further research and development) required to meet the needs of the customers, the degree of customization required to penetrate the market and the importance of producing a “standardized” product.
Specific issues that might arise in analyzing a new foreign market are discussed in
Chapter 4.
Competitive Analysis
Although the company may have a significant strategic advantage in its chosen market, such as innovative and proprietary technology, a properly chosen market niche that is likely to expand in the future also can be expected to attract competition from other companies. Accordingly, the business plan should describe the following: ■ The forces that drive competition in the industry ■ The skills and resources of actual and potential competitors ■ Any barriers to entry that might be faced by new competitors, including restrictions placed on foreign participation in the local economy ■ Potential “substitutes” in the form of products that may provide either a better answer for the needs of the customer or change their requirements altogether ■ The potential actions of parties already involved in the relevant value chain that might materially impact the market
COMPETITIVE ENVIRONMENT The business plan should cover the specific competitive environment in which the company operates, including: ■ Identification of the company’s major competitors ■ Description of the nature and area of their competition, whether direct or indirect ■ A candid assessment of the company’s standing within the industry, both in terms of sales volume and with respect to the characteristics on which the needs of the customers are satisfied ■ Identification of noncompetitive firms that are willing to support the company’s products PLAN TIP: One means of entering a foreign market is by gaining access through other firms and distributors that sell competing products. In this case, widespread acceptance and support of your products could hinge on extra features, such as warranty, liability, image or reputation. If your company relies on this approach to introduce its products into a new foreign market, remember that it is often not economical in the entry stage to provide direct warranty or local customer services following the sale. Your company may instead need to rely on local partners to supply the required support. An accurate assessment of the capabilities of local noncompetitive firms could make the difference to fast acceptance and growing market share in a foreign country.
BASIS FOR COMPETITION AND COMPETITIVE FACTORS A business plan is most useful if it identifies the “basis for competition” within the industry and the various factors (e.g., cost, manufacturing efficiencies, product reliability, technology, breadth of products, capacity, capital, distribution or service) that the company believes may influence future competition within the industry. If the company’s products fall into more than one market segment or applications field, the plan should address each one.
SKILLS AND RESOURCES OF COMPETITORS A mere listing of competitive factors is not very comprehensive. The business plan discussion should extend beyond the listing to an analysis of the following points: ■ The features that distinguish the company’s products from those offered by competitors ■ The strength of the company’s resources and assets in relation to competitors ■ The competitive strategies of other firms ■ The anticipated response of competitors to the company’s products, especially when the company is new to the market
BARRIERS TO ENTRY When formulating an international business plan, you should remember to look into the future as far as reasonably possible. This means that you should consider not only the current competitors in the market, but also the possibility that other firms will enter the market in the future. The risks presented by new competition are particularly high in new and innovative industries, especially if significant profit margins are anticipated and the market is expected to expand within a few years. As part of your business plan, you would be wise to identify “barriers to entry,” which might make it difficult for new competitors to enter the market, including: ■ The amount of capital required to achieve required economies of scale ■ The proprietary nature of products or technology ■ The importance of brand identification ■ “Switching costs” for the customer base ■ The availability of adequate distribution channels ■ The existence of absolute cost advantages ■ Regulatory requirements, such as foreign investment laws, that might delay or reduce new competition When a company is a pioneer in a new market, the business plan should describe the efforts that the company might be able to undertake to create barriers against new competitors. If applicable, reference might be made to the company’s strategies for developing a broad product line, a large installed base of satisfied and loyal customers or the establishment and maintenance of a strong technology rights position. If the company is itself attempting to enter a new market dominated by established firms, the plan must carefully address how the company proposes to overcome any existing advantages held by current market participants. These might include rapidly achieving manufacturing competence through a strategic alliance with another firm or capitalizing on relationships that have been
established with potential customers in other business areas. In these situations, it might be best for the company to pursue a strategic alliance with one of the local firms to gain access to manufacturing facilities and existing distribution channels.
