Appendix A The Business Plan A key element of business success is a business plan, a written statement of the rationale for the enterprise and a step-by-step explanation of how it will achieve its goals. A business plan is a blueprint, or written document, that structures all of a firm s activities, including the implementation and control of those activities. It should explain the purpose of the company, evaluate its competition, estimate income and expenses, and indicate a strategy for acquiring sufficient funds to keep the firm going. It should also be formally prepared and contain a detailed statement of how the firm will carry out its strategy. However, a business plan should act as a reference guide, not a shackle that limits the firm s flexibility and decision making. Developing a business plan is important for both brand new and existing businesses. For a start-up firm, the business plan provides a street map to help it fulfill the entrepreneur s vision. For existing businesses, it is an excellent way for a company to renew its commitment to existing goals and evaluate their merits. Regardless of whether the business plan is for a new or already-existing firm, it should include an executive summary, situation analysis, SWOT (strengths, weaknesses, opportunities, and threats) analysis, business resources, business strategy, financial projections and budgets, and controls and evaluation (Table A.1).
432 Appendix A The Business Plan Table A.1 The Components of a Business Plan I. Executive Summary II. Situation Analysis A. Competitive forces B. Economic forces C. Legal and regulatory forces D. Technological forces E. Sociocultural forces III. SWOT Analysis A. Strengths B. Weaknesses C. Opportunities D. Threats IV. Business Resources A. Financial B. Human C. Experience and expertise V. Business Strategy A. Objectives B. Key strategy for using capabilities and resources VI. Financial Projections and Budgets VII. Controls and Evaluation A. Performance standards and financial controls B. Monitoring procedures C. Performance analysis EXECUTIVE SUMMARY The executive summary is simply a brief synopsis of the overall business plan. It generally consists of an introduction, highlights of the major aspects of the plan, and implementation considerations. It does not provide detailed information. Rather, the summary should be short and interesting, and it should give the reader an idea of what is contained in the business plan. It is essentially an overview of the plan so that readers can quickly identify the key issues or concerns related to their role in the planning process.
SITUATION ANALYSIS Appendix A The Business Plan 433 The situation analysis examines the difference between the business s current performance and past-stated objectives. In a brand-new firm, it assesses where the entrepreneur is now in his or her development. The situation analysis may also summarize how the current business situation came to be, using data obtained from both the firm s external and internal environment. Depending on the situation, details on the composition of the target market, current marketing objectives and strategies, business trends, and sales and profit history may also be included. The situation analysis enables the entrepreneur either to evaluate the business s current mission or, in instances where a clear vision is nonexistent, to facilitate the articulation of its mission. This situation analysis should include a careful evaluation of the firm s current objectives and performance, as well as specify how performance is to be measured. A good situation analysis provides input for the next step in the business plan, the SWOT analysis. It is the situation analysis that identifies the issues, concerns, or variables analyzed in the SWOT analysis. SWOT ANALYSIS The SWOT (strengths, weaknesses, opportunities, and threats) analysis section of the business plan identifies and articulates all the organization s competitive advantages/strengths as well as its weaknesses in order to develop strategies for capitalizing on the strengths and minimizing the weaknesses. Obviously, if the business is to be successful, its strengths should outweigh its weaknesses. A SWOT analysis also includes a clear assessment of existing and future opportunities and discusses ways of exploiting them. Finally, it examines the threats facing the firm and ranks them in order of their impact on the business. In analyzing strengths and weaknesses, opportunities and threats, the business plan must address both internal and external elements. Internally, the firm must look at the strengths and weaknesses of its major functional areas management, operations, finance, and marketing; it must also look at the opportunities and threats related to specific elements in the external environment of the business the economic, political, legal and regulatory, competitive, technological, and social and cultural factors. The business plan should also include predictions about the future directions of those forces and their possible impact on the implementation of the business plan. Because of the dynamic nature of these factors, managers should periodically review and modify this section of the plan to allow for changes. The SWOT analysis has gained widespread acceptance because it provides a simple framework for evaluating a company s strategic position. When analyzing the strengths and weaknesses in terms of specific target markets, both quantitative and qualitative variables identified in the situation analysis should be considered. The firm must focus on those strengths and opportunities that will yield competitive advantage as well as those threats and weaknesses that will erode it. Thus, it is a good idea for the planner to rank the factors under each category according to their impact on the execution of the businesses strategy.
434 Appendix A The Business Plan Strengths and Weaknesses Strengths and weaknesses exist inside the firm or in key relationships between the firm and its suppliers, resellers, and customers. Strengths include any competitive advantage or other distinctive competencies (things that the firm does better than any others) that a company can employ in the marketplace. Strengths exist relative to competitors, such as cheaper access to capital, good relations with vendors and customers, a unique product, or an advantageous location. Thus, strengths specified in a firm s business plan will be specific to that firm and not shared by its competitors. If all of a business s competitors have low production costs, then low cost is not a strength for that business, unless its costs are even lower. A company s distinctive competency can play a key role in positioning it and its products in the minds of customers and so forms a unique strength. Weaknesses are constraints that limit certain options in the business strategy. A poor image of the firm s products in the minds of consumers is an example of a weakness. It is also true that some weaknesses are less important than others. For example, having higher costs than competitors may not be an issue if cost is not the basis for competition in the industry. The planner must therefore determine which weaknesses have the greatest effect on the firm s competitive position and thus require immediate attention. In developing a business strategy, a business needs to both capitalize on its skills and talents and ensure that its strategies emphasize these. In order to identify strengths and weaknesses, it is important to have data about current market/product positions, including past performance and expected performance in the next planning period, which should be expressed in the situation analysis. Opportunities and Threats The second part of the SWOT analysis addresses external opportunities and threats present in the firm s operating environment. These opportunities and threats exist largely independent of the firm and its operations. An opportunity is a favourable set of conditions, which limit barriers or provide rewards, that the firm can exploit with a high probability of success. Examples of opportunities include an unmet product need (assuming the firm has the capability to meet that need); a new, lower-cost source of a vital raw material; new technology; or new legislation that opens up a product market or restricts competitors access to a market. This section of the business plan should place the most attractive opportunities having the greatest potential for success at the head of the list, while those that are less attractive or have a smaller potential for success should receive less emphasis. Threats relate to barriers or conditions that may prevent the organization from achieving its objectives, ultimately leading to a loss of competitive advantage. Examples include the direct actions of competitors (such as the introduction of a new product or product innovation), adverse governmental legislation, loss of access to cheap capital or other resources, or an economic downturn. This phase of the business plan orders priorities for action in light of the strengths and weaknesses of the firm in dealing with a particular set of external circumstances. The analysis of the threats and opportunities cannot be completed without the previously mentioned assessment of legal, political, regulatory, technological, competitive, social, and economic factors that will affect the firm s internal strengths and
Appendix A The Business Plan 435 weaknesses. It is also necessary to make predictions about the future. While environmental factors may threaten a firm s ability to achieve its objectives, they may also provide opportunities. BUSINESS RESOURCES A company s human and financial resources, as well as its experiences and expertise, are major considerations in developing a business plan. The business plan should therefore both outline the human, financial, and physical resources available for accomplishing goals and describe resource constraints that may affect implementation of the plan. This section also describes any distinctive competencies that may give the firm an edge, and it takes into account strengths and weaknesses that may influence the firm s ability to achieve implementation. Financial resources include all funds available to carry out the plan. It is necessary to detail what funds the firm has at hand and what can be accessed through other sources, such as loans, lines of credit, or additional equity arrangements (such as a venture partner or a public stock offering). Human resources refer to the people that the business has ready to commit to the execution of the plan as well as the quality of that labour force. Physical resources include such things as property, facilities, and equipment required to execute the strategy. This category includes the raw materials available as well as retail outlets and office space. These financial, human, and physical resources comprise the tangible aspects of the firm s resources. Experience and expertise are intangible aspects, but they are just as crucial to success as the tangible ones. Experience refers to any competence the firm may have developed over time as a result of carrying out activities related to future ones envisioned in the plan. For instance, the firm may have experience marketing home electronics, which may be transferable to marketing computers for home use. Or, the firm may just be further along on the experience curve than its competitors. Expertise is related to experience and includes any proprietary knowledge that the firm may possess, such as patents. Other areas of expertise that represent vital resources include superior knowledge of the market and industry, management wisdom, and competence or scientific knowledge embodied in research and development personnel. BUSINESS STRATEGY This section of the business plan spells out the business s objectives and its strategy for achieving them. Objectives After taking an inventory of the business s resources and conducting a SWOT analysis, the planner should develop concrete, specific objectives. For example, the plan might specify the firm s objective to become the leader, in terms of market share or sales, in a particular industry, segment, or niche. Or the objective might be to achieve a high return on investment and thus focus on profitability. While a company can have multiple objectives, each should be stated explicitly, in quantifiable terms if possible. For instance, an objective of being the leader in sales should state the level of sales desired and in what time period. A profitability objective should state what return on investment is targeted and within what time period. These objectives will
436 Appendix A The Business Plan therefore serve as goals to be achieved by the firm and as yardsticks against which to measure its progress. Because most firms have a number of objectives, they should be ranked in order of importance. Strategy Once the objectives have been expressed, the business plan should spell out the strategy (or strategies) the firm will use to achieve those objectives. The strategies should be clearly stated in order to guide development of the specific programs and activities that will be used to execute them. For example, if the firm s primary objective is to accumulate market share, it may adopt the strategy of being the lowest-cost producer. Therefore, the implications of being the lowest-cost producer should be specifically stated in the plan. If the major objective is to achieve high returns on investment, the chosen strategy may be a focus strategy, combining a low-cost orientation with some focus on a particular market niche. This strategy would then have to identify the targeted niche, the desired cost levels, and so on, in order to allow formulation of programs and their implementation. FINANCIAL PROJECTIONS AND BUDGETS Financial projections and budgets delineate costs and estimates of sales and revenues. This section outlines the returns expected from implementing the business plan. It should estimate the costs of implementing the plan and weigh those costs against the expected revenues. It should also include a budget to allocate resources in order to achieve business objectives. These financial projections and budgets should be sufficiently detailed to identify the source and projected use of funds, broken down according to each activity in the plan. For instance, if employees need additional training, what will it cost and where will the funds come from? How much will be used in advertising? In reality, budgetary considerations play a key role in the identification of alternative strategies, as well as in the development of plans for those strategies that are identified as most promising. The financial realities of the organization must be monitored at all times. For example, proposing to expand into new geographic areas or to alter products without specifying the extent and source of the financial resources needed to do so is a waste of time, energy, and opportunity. Even if the funds are available, the expansion must be a good value and provide an acceptable return on investment to be part of the final plan. CONTROLS AND EVALUATION This section of the business plan details how the results of the plan will be calculated. It should specify what measures of performance will be used to assess the current achievements and identify internal performance data and external-environmental relationships for diagnosis and evaluation. Next, a schedule should be developed for comparing and monitoring the results achieved with the objectives set forth in the business plan. Finally, the plan may offer guidelines outlining who is responsible for monitoring the program and taking remedial action.
Appendix A The Business Plan 437 In order for controls to be implemented, the firm must utilize information from the SWOT analysis, look ahead, and determine what will affect the implementation of the business plan during the upcoming planning period. This should create the database for monitoring and evaluating performance and taking corrective action. I. EXECUTIVE SUMMARY The executive summary is a synopsis of the overall business plan. It is best written after the entire business plan has been completed. II. SITUATION ANALYSIS The situation analysis examines the difference between the business s current performance and past-stated objectives. A. Competitive Forces Who are our major competitors as of today? What are their strengths and weaknesses? Who are likely to be our major competitors in the future? (Repeat analysis to examine economic, political, legal and regulatory, technological, and sociocultural forces.) III. SWOT ANALYSIS The SWOT analysis identifies and describes the organization s strengths and weaknesses and the opportunities and threats it faces in order to develop strategies for capitalizing on the strengths and opportunities and minimizing the weaknesses and threats. A. Strengths Strength 1: How does this strength affect the operations of the company? How does this strength assist the company in meeting its objectives? (Repeat this process for all of the strengths that can be identified.)
438 Appendix A The Business Plan B. Weaknesses Weakness 1: How does this weakness affect the operations of the company? How does this weakness reduce the company s ability to meet its objectives? (Repeat this process for all of the weaknesses that can be identified.) C. Opportunities Opportunity 1: How is this opportunity related to current or future company operations? What actions must the company take in order to take advantage of this opportunity? (Repeat this process for all of the opportunities that can be identified.) D. Threats Threat 1: How is this threat related to current or future company operations? What actions must the company take to reduce or eliminate this threat? (Repeat this process for all of the threats that can be identified.) IV. BUSINESS RESOURCES This section outlines the human, financial, and physical resources available for accomplishing goals and describes resource constraints that may affect implementation. A. Financial Resources What financial resources are available for accomplishing company goals?
B. Human Resources Does the company have the personnel needed to implement the goals? Appendix A The Business Plan 439 C. Experience and Expertise Do employees have the experience and expertise needed to successfully achieve stated goals? Will employees require additional training? How will this training be funded? V. BUSINESS STRATEGY This section spells out the business s objectives and its strategy for achieving them. A. Objectives Objective 1: What is the specific and measurable outcome and time frame for completing this objective? How does this objective take advantage of a strength or opportunity? (Repeat this process for all of the objectives specified.) B. Strategy for Using Capabilities and Resources How can the company s strengths be matched to its opportunities to create capabilities? How can the company convert its weaknesses into strengths? How can the company convert its threats into opportunities? VI. FINANCIAL PROJECTIONS AND BUDGETS Financial projections and budgets delineate costs and estimates of sales and revenues, so this section outlines the returns expected through implementation of the plan and weighs the costs incurred against the expected revenues.
440 Appendix A The Business Plan Attach financial projections to this worksheet and develop alternative scenarios. VII. CONTROLS AND EVALUATION This section details how the outcomes of the plan will be monitored and measured. A. Performance Standards and Financial Controls Activity 1/Budget: Performance Standard: Possible Corrective Action: (Repeat this process for all of the performance measures.) B. Monitoring Procedures How will all of the activities be monitored in order to ensure success? What will be the schedule of the monitoring of activities (i.e., will the monitoring be done weekly, monthly, quarterly, etc.?)? C. Performance Analysis Currently, how is the company performing in terms of sales volume, market share, and profitability? How does the company s current performance compare to other firms in the industry? If the company s performance is declining, are its objectives inconsistent with changes in the external environment? Is the performance of the industry as a whole improving?