Learning Corner - Guide to Business Planning

Quick reference guide to business planning techniques

Benchmarking Obtaining financial and operational data from competitors against which a business can measure its own performance. Helps to set targets and focus improvements on areas where this is most needed.

Brand perception map Shows how a brand appeals to a differentiated set of needs. If segmentation is needs based, the product should score highly against
the targeted needs. Relevant for developing the marketing strategy.

Business/industry attractiveness screen A matrix commonly known as the GE Business/Industry Attractiveness Screen. It is used to evaluate the position of a business or business unit.

Business design The process of establishing a business design incorporates elements of strategy and tactics. The business design describes the fundamental characteristics of the business, the most crucial of which is how the business establishes and maintains sustainable competitive advantage.

Core competencies The functions or practices that are central to a business. The activity (or activities) that the business believes it does best. If a business's core competencies it is better placed to achieve competitive advantage.

Curve fitting A form of extrapolation used for market forecasting. It is based on the observation that technological and market developments usually follow an s-shaped pattern.

Diffusion of innovation A model that describes how a new product or service is adopted by a population, most commonly known as the Bass model. Used for market forecasting.

Directional policy matrix A technique derived from the growth-share matrix, but using a much wider range of factors to analyse a portfolio of products in terms of business sector prospects and business position.

Discounted cash flow One of the most fundamental techniques for evaluating a business opportunity. It examines the amount, timing and risk associated with the cash flows of the business. An essential technique for evaluating strategic options.

Economies of scale Economies of scale may occur when production volumes increase. Important in the context of cost leadership strategies and forecasting.

Experience curve The relationship between cumulative production volume and unit costs. Unit costs can decline in a predictable manner as the cumulative quantity produced over time increases. Useful for strategic planning and forecasting.

Financial forecasting. All business plans require financial projections for the balance sheet and, most crucially, its cash flow. Financial forecasting often involves preparing a spreadsheet model.

Generic strategies. Porter's three generic strategy has two variants: cost focus and differentiation focus. Used to generate strategic options.

Growth-share matrix. Used to analyse a portfolio of products using market growth and market share. It has strategic implications, particularly for resource allocation in a multiple product business.

Industry life cycle. A concept that describes the different growth stages of an industry.

Key differentiators and unique selling points. Unique attributes that differentiate a business from its rivals. A business should leverage the key
differentiators in order to achieve competitive advantage.

Key success factor ranking A method of analysing competitors against your own business, applicable to the analysis of the firm as part of strategic planning.

Market research Collecting and analysing data from prospective customers to establish the likely demand for a new product or service or to understand better existing products.

Market segmentation A market segment is defined as a sufficiently large group of buyers with a differentiated set of needs and preferences that can be targeted with a differentiated marketing mix. To be of value, the benefits of segmentation must outweigh the costs. Useful for developing the marketing strategy and for forecasting.

Marketing mix A tool to position products in the target market. The marketing mix is defined by the four Ps: product, price, promotion, place. All elements of the marketing mix together constitute the "offer". Relevant for developing the marketing plan.

PEST analysis An extremely useful technique for examining the environment in which the business operates. PEST is an acronym for the Political, Economic, Social and Technological influences on the business.

Porter's five forces model Provides an analytical framework for the analysis of the structural factors that shape competition within an industry and from which a number of generic competitive strategies can be derived.
Portfolio analysis Uses techniques such as the growth-share matrix to analyse a portfolio of products or strategic business units to make decisions about their strategic direction and resource allocation.

Price elasticity of demand Measures the sensitivity of demand growth of a product to the percentage drop in the unit price of the product. Used in market forecasting.

Product life cycle A concept that describes the different stages of a product from introduction through growth to maturity and decline. Has
applications in market forecasting as well as in strategic and tactical planning.

Product positioning map A technique to map the position of a firm's of the customer. Relevant for marketing strategy and planning.

Project management Techniques for managing efficiently the process of business planning. For a lone entrepreneur, issues of co-ordination do not arise and there is less need for detailed project management. In larger organisations, where the business planning process involves a large number of people across a range of different departments, effective project management of the process becomes essential.

Ratio analysis Certain financial ratios can be calculated from the projected financial statements that allow the liquidity, profitability and
efficiency of the business to be evaluated. Ratio analysis can be applied to evaluate strategic options.

Regression analysis A statistical technique that examines the relationship between dependent variables, such as sales, and independent variables, such as price and commission. This methodology can be used for market forecasting as well as tactical decision-making.

Resource audit Identification of operational, human, organisational and financial resources coupled with an analysis of efficiency and effectiveness of their utilisation. A business that makes optimum use of its resources may gain competitive advantage.

Risk analysis Faced with an uncertain future, a business must examine the risks that it might face and the tactics that can be used to mitigate them.

Scenario planning A powerful technique for developing different views of the possible future environments facing the business. It is often used in conjunction with PEST analysis and is useful for forecasting in uncertain markets.

Strategic business unit (SBU) A division or department of a corporation that is sufficiently self-contained and could operate independently from the whole business. In larger organisations, strategic planning can be carried out at the level of the SBU. The concept is applicable to portfolio strategies.

SWOT analysis A simple and effective technique that analyses a Opportunities and Threats.

Time series method A statistical analysis technique that examines how observed sequences of observations evolve and develop over time. Often used in market forecasting.

Value add analysis Identifies how much value is created at different stages of the value chain. This enables a firm to focus improvements or strategic change on areas where more value can be added.

Value chain analysis Explores the configuration and linkage of different activities that form a chain from original raw materials through processing, manufacturing, packaging, distribution, retailing and customer care to the end customer. It is used to optimise the allocation of resources.

Value system Extends the value chain beyond the boundaries of the business and recognises that a business is dependent on relationships with suppliers and customers. It can be used to make decisions about backward or forward integration to help position a business at the most valuable parts of the value system.

Vision, mission and objectives Vision explains what the business intends to do. Mission explains how this vision is to be turned into reality. Objectives provide a yardstick against which success can be measured.

VRIO analysis A technique for analysing whether a resource is Valuable, Rare and Imitable and whether the Organisation is taking advantage of the resource.



The Business Plan

No two businesses are ever identical and no two business plans are ever alike, but good business plans always contain a number of common themes. They "tell a story" and explain how the business will achieve its objectives in a coherent, consistent and cohesive manner. The "story" will be focused on the needs of the customer. The plan will identify the market, its growth prospects, the target customers and the main competitors. It must be based upon a credible set of assumptions and should identify the assumptions to which the success of the business is most sensitive. It should also identify the risks facing the business, the potential downsides and the actions that will be taken to mitigate the risks. As the blueprint for the business, it should describe what makes
the business different from its competitors: its source of competitive advantage and how it will be sustained in the longer term. It should describe the experience and track record of the management team, and, within larger organisations, the plan should have the support of those in the different functions who will be involved in implementing it. Lastly, it should identify the funding being sought from potential investors.

A good business plan checklist:
 tells a coherent, consistent and cohesive, customer focused story;
 clearly defines the market, its prospects, the customers, suppliers and competitors;
 contains credible business planning assumptions and forecasts;
 describes how the business will achieve sustainable competitive advantage;
 identifies the assumptions to which the business is most sensitive, the potential risks and any mitigating actions;
 is supported by those that must implement it;
 contains a description of the individuals involved in managing the business;
 identifies the funding requirement for the business.

What are they for?
Securing finance
Operational management and budgeting
Other uses

Who are they for?
a) Bankers and others providing debt financing

When lenders review a business plan they are concerned with three main issues:
 If the loan is only one element of the financing necessary to fund the business plan fully, are the other sources of finance in place and secure?
 Will sufficient cash be generated by the business to meet interest payments on the loan and to repay the principal?
 Are there physical assets, or other forms of collateral, within the business against which a loan can be secured so that, were the business to fail, the lender would be able to get all or some of its money back?

b) Providers of equity funding

As providers of equity finance or share capital are last in the line of creditors to be paid when a firm goes bust, their concerns are different from those of bankers:
 Is the business proposition a strong one and is there an identifiable source of sustainable competitive advantage that will allow the business to outperform the market in the long term?
 What is the expected return on equity (ROE – see Chapter 17)?
 How experienced and capable is the management team?
 Is the business plan fully funded and what are the risks that more equity capital will be needed, leading to a dilution of the equity stakes of
those who invest first?
 What are the growth prospects for the business and the potential for capital appreciation and/or a strong dividend stream?
 What returns have been achieved on any previous equity injections into the business?
 How will the providers of equity be able to exit from the business and realise the gain on their investment?

c) The management team of a large, existing business

The following list gives an indication of the questions they are likely to ask:
 Is the plan consistent and supportive of the business's overall strategy?
 What is the likely impact on the overall financial performance of the business in terms of revenue growth, profitability and gearing?
 Will adopting the business plan require the raising of additional financing?
 Does the business plan reinforce the position of the business's brand?
 Is the business plan feasible and within the scope of the organisation's capabilities?
 How will the press and the financial markets react to the adoption of the business plan?
 Will the adoption of this business plan have an impact on other areas of the business?
 What alternative opportunities could be pursued?


A business plan template

Executive summary
Vision, mission, objectives
Current state of the business
Products and services
Strategy and sources of sustainable competitive advantage
Customer acceptance
Summary financial forecasts
Money required, timing and deal on offer

Basic business information
Title
Contents
Contact information
Document control
Professional advisers
Definitions
Legal structure and corporate data

Current business situation
Definition of the current business and its market
Corporate history, major events and past financial performance
Current business and market position
Core competencies
Current business organisation and outline business infrastructure

Strategic analysis
Political, economic, social and
technological analysis and impacts
Key differentiators and unique
selling points
VRIO analysis
Core competencies
Configuration of resources
Value add analysis
Value chain analysis
Value system
Resource audit
Operations resources
Human resources
Organisational resources
Financial resources
Industry life cycle
Industry structure
Competitor analysis
SWOT analysis

Strategic plan
Vision, mission and objectives
Sources of sustainable competitive advantage
Competitive position
Market positioning
Brand strategy
Portfolio strategy
Business design

Marketing plan
Market segments, size and growth
Description of customers and customer needs
Target market segment
Product positioning and value
proposition
Marketing mix
Description of products and services
Pricing and discounting
Advertising and promotional plans
Channel and distribution strategy
Guarantees and warranties
After-sales service and customer care
Comparison with competition
Performance and economics
Marketing forecasts

Operations/production
Physical location
Make or buy considerations
The production process
Facilities, equipment and machinery
Scalability of operations
Engineering and design support
Quality control plans
Staffing requirements
Sources of supply of key materials

Research and development
Objectives
Organisation
Plans
Resources

Management and organisation
Organisation chart
Top management
Management's ability to deliver the plan
Corporate governance and shareholder control
Staffing
Recruitment
Training
Labour relations
Office space and amenities
Employment and related costs

Forecasts and financial data
Summary of performance ratios
Sales forecast
Assumptions underpinning financial forecasts
Profit and loss account (income statement)
Balance sheet
Cash flow statement
Evaluation criteria and valuation
Discounted cash flow
Payback
Breakeven
Benchmarks
Sensitivity analysis

Financing
Summary of operations prior to financing
Current shareholder loans outstanding
Funds required and timing
Use of proceeds
The deal on offer
Anticipated gearing and interest cover
Exit routes for investors

Risk analysis
Risk overview
Limiting factors
Critical success factors
Alternative scenarios and strategic responses
Specific risks and risk-reduction strategies

Business controls
Information technology
Financial
Sales and marketing
Operations
Other controls

Appendices
Glossary of terms
Details of market research
Consultants' reports
Product specifications Marketing collateral Orders in hand Organisation charts Curricula vitae Detailed financial forecasts Technical data
Details of patents, copyright


In tailoring the template to meet the specific needs of the project or business being presented, the following questions should be asked:
 What is the ultimate objective of preparing the business plan?
 How will the business plan be used and by whom?
 To what level of detail should the plan be prepared: will the plan be used to examine high-level strategic issues or for actually running the
business?
 What is the scope of the business plan: does it relate to the entire business, a division or geographic region or just a product or service?
 For what time period should the business plan be prepared?
 Should the financial projections within the plan be prepared on a monthly, quarterly or annual basis or some combination, for example monthly for the first two years and quarterly thereafter?


Getting started

The basic business information
It should include the following:
 Title
 Contents
 Contact information
 Document control
 Professional advisers
 Definitions
 Legal structure and corporate data

The section of legal structure and corporate data should include the following pieces of information:
 The full name of the business
 The corporate status of the business
 Its capital structure
 The address of the registered office
 The registration number
 The head office address

The executive summary

The executive summary should contain the following information:
 Current state of the business
 Products and services and the customers
 Sources of sustainable competitive advantage
 Shareholder objectives and business strategy
 Summary financial forecasts
 Decision or funding being sought

The historic elements

The history should include the following:
 Date founded Founders
 Changes in name
 Scope
 Environmental changes
 Dates and explanations of any major acquisitions or divestitures
 Major obstacles faced
 Periods of growth and slow-down


For more Information
* Strategic Business Planning Guide, Enterprise Planning and Development, Small Business Start-up, Survival and Development, Enterprise Sales and Operations Planning, Business Modelling *

Learning Corner - Guide to Business Planning