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CHAPTER EIGHT BUSINESS PLAN DEVELOPMENT A. O. Adegoke and A. O. Omojola Learning objectives This chapter discusses the processes involved in business plan development. It introduces the important aspects that guarantee the success or failure of a business enterprise. The essential components that are considered in business plan development are discussed in details. By the end of the chapter, you should be able to: Ø describe all terminologies involved in a business plan development; Ø discuss the link between ideation and fruition; Ø provide a comprehensive distinction between business plan and feasibility studies; Ø write a compelling business plan; and Ø evaluate a business plan. Introduction There is nothing as good as developing and writing your own business plan. Since the idea was generated by you and indeed, you observed an opportunity in the environment that can lead to maximising the gains involved in the ideation, it behoves you to write a business plan and be able to defend it in the presence of investors and other readers. Writing your business plan gives you the privilege to hone its content and convincingly create avenues for ‘owning it’ fully. A lot of intellectual property goes into the ideation, creation of value and indeed writing a plan that you do not want to jeopardise by contracting out the planning process. There are presently arguments as to whether a business plan is really necessary, some of which will be considered at the discussions on case studies towards the end of the chapter. Suffice to say that for a small and medium scale enterprise which is the likely investment undergraduates and fresh graduates may engage in, it is essential to be acquainted with the practical details involved in the design, layout, writing and presenting a compelling business plan that will attract investors. One practical value of a well-written business plan is that it gives opportunity to the owner to present a sound and logical defence of the plan to prospective investors and business partners. In writing a business plan, it is important that you answer two important questions. You must identify the audience and indeed what you want their response to be. In other words, the design and layout of a plan will provide a practical guide to the reader and makes it possible for you to achieve your aim - the conversion of the business idea to profit in terms of human and material gain. Feasibility studies and business plan compared A business plan is a written document that describes a business, its objectives, strategies, market and financial forecasts. It has many functions which include securing external funding, measuring success,etc.It is a roadmap for a successful business venture. People refer to the business planning process in various ways - business strategy, marketing strategy, strategic business planning, etc; they all cover the same basic principles. When faced with the task of business plandevelopment, it is important to clarify exactly what is required. Many people often confuse the role of two of the tools used by groups in project development process; the feasibility study and the business plan. However,various components are common to both. Assuming positive feasibility study results, some but not all of the information developed in the feasibility study will be incorporated into the business plan. The essential differences are as follows: Ø A feasibility study is carried out with the aim of finding out the workability and profitability of a business venture. Ø A feasibility study is filled with calculations, analyses and estimated projections while a business plan is made up mostly of tactics and strategies to be implemented to grow the business. Ø A feasibility study is all about the viability of business idea while a business plan is about the growth and sustainability of the business. The business plan is created later in the development process than the feasibility study. 7.4 The business background A business either provides goods or services. In the provision of services, the output appears intangible and it is important that participation by outsiders be taken into consideration. In essence, the service must be one that will be acceptable to the customers. Here, the perceived and real values provided by the service must be evident for the customers to buy into. Provision of goods belongs to the tangible where the customers provide the final proof of quality. In both instances, the owner of the plan must put in place definite measurable outputs that will capture the purpose of the business. 7.5 Analysis before planning In order to present a compelling business plan, it is often advised that the entrepreneur takes into consideration some essential details. It is not just good enough to write a business plan, adequate preparation must be put in place. In most instances such preparatory tasks are in form of thought-provoking posers that must be genuinely and sincerely attended to in order to have a business plan that will attract investors. Before planning, it is helpful to clearly understand the following among others: Ø What are you actually aiming to achieve? (the vision) Ø What is your policy/position on corporate social responsibility and ethics, etc? (the philosophy) Ø And what returns on investment (or alternative financial performance) does our activity/enterprise require - is this a strategic driver in itself, or the means by which we maintain our activities in support of our aims? (the strategy) Ø How much of personal resources do you have to commit to the business? (the funding) Ø What will you do if the Business fails? (the exit strategy) Ø How broad do you want the product/service to be at various stages of the business life cycle? (the marketing strategy) Ø What type of human resource structure and terms will be instituted?(the management) Ø Will you use family, friends, or other associates and for what part of the business? (the succession) Ø Will you pay for the services of collaborators? (the financials) Ø Will the business be a sole proprietorship or partnership?If you want partners, what roles will they play? (the model). Carefully attending to these posers will create vision and help in developing appropriate tactics and strategies that will drive the business to success. Business plan and objectives A long standing debate has been the necessity for a business plan. Many proponents have opined that what is required is a clear vision of what you require and how you intend to go about it. An idea not penned down is not yet a plan. It is in the process of writing that a plan is set out and set forth. Thus, a business plan has some clearly defined objectives that an entrepreneur must not miss. Some of the objectives of a well-written and laid-out business plan are as follows: (i) To attract investors. Investors will want to see the vision of the business and what is contained in the business plan. They will want to study both the workability and profitability of the business idea prior to investment. All these can only be communicated in a well-written plan. (ii) To see if your business ideas will work. Many ideas, as good as they seem, may not be practicable. It is thus essential to write a business plan to test the ideas and see if it will work. (iii) To outline each area of the business. The business plan happens to be the only instrument for laying out the various segments of a business idea. Thus, one clear objective of a business plan is to be able to describe all the key areas and apportion appropriate resources (technical, financial and personnel) to the various areas. (iv) To set up milestones. The business plan provides a means of assessing the performance of an enterprise over time and it guarantees an objective measurement of progress over time. (v) To learn about the market. Without a business plan, it might be difficult to assess the market the idea and innovationyouare entering into. (vi) To secure additional funding or loans. A business plan over a given period also provides a means of securing additional funding. Once investors evaluate the progress of an enterprise over time using the plan as a yardstick, a sound confidence is provided to grant additional investment and loans. (vii) To determine your financial needs.Many things might not be captured in the financial requirements of a new or existing business until a carefully written business plan is made. Thus adequately capturing all areas requiring financial intervention will be done when such are laid out in business plan. (viii) To attract top-level people. The business plan provides a component to discuss the personnel strategy. In this strategy, it is expected that the benefits accruable to staff are captured. A well-written business plan serves as an avenue for attracting top-level personnel as they will have a clear awareness of what the business has to offer them in return for their loyalty, commitment and dedication. (ix) To monitor your business. The business plan is often described as the main instrument that provides a roadmap for the success of an enterprise. The various parts covered in a business plan also provide key points of assessment over time. (x) To devise contingency plans.The business plan is the main document often required by all and in particular, investors to provide the alternative strategy should the business fail. One key area captured in a business plan is the exit strategy and this has the objective of providing a mechanism for sharing both the liabilities and assets of a successful or failed business. A business plan provides the following advantages;
7.6 The length of a business plan There has been an unending argument concerning the exact length of business plan. While there are fast rule about this, some determinants of the length of a business plan are discussed in this section. The newness and complexity of business idea and purpose for business plan (either for internal use, such as to monitor the business growth path or external use to raise funds, or win the loyalty of customers, distributors or employees) determine the length of a business plan. Business plans therefore differ widely in their length, appearance, content and the emphasis placed on different aspects of the business. Depending on your business and your intended use, you may need a very different type of business plan: • Mini-plan: This requires less emphasis on critical details. It is used to test your assumptions, concept and measure the interest of potential investors. • Working plan: This places emphasis on details. It is used to review business operations and progress. • Presentation plan: This emphasises the marketability of the business concept. It is used to give information about the business to bankers, venture capitalists, and other external resources. Essential components of a business plan A business plan has well-defined components that must be clearly identified. It is not in all instances that the components are covered. In fact, the length of a business plan is determined by such factors as newness and complexity of the business idea,purpose of the business plan (either for internal use, such as to monitor the business growth path or external use to raise funds, or win customers’, distributors’ or employees’ loyalty). The following descriptions provide the commonly considered guidelines for a written business plan. Title page Title or heading of the plan and brief description if required, author, date, company/organisation if applicable, details of circulation and confidentiality. Table of contents A list of contents (basically the sections listed here, starting with the introduction page) showing page numbers, plus a list of appendices or addendums (added reference material at the back of the document) allowing the reader to find what they need and navigate the document easily and to refer others to particular items and page numbers when reviewing or querying. It may be necessary to also provide an introduction and purpose of the plan, terms of reference if applicable (usually for formal and large plans or projects). Executive summary This should not be more than a page long. The key points of the whole plan including conclusions, recommendations, actions, financial returns on investment, etc., should be clearly readable in a few minutes. Company summary Here, you will need to provide your company’s name. It is advised to choose well, a name that clearly identifies the purpose of the company or a footnote describing what the company’s scope of activity entails. Examples include Immaculate Ventures to describe a sewing or dry-cleaning business. In addition, the structure of the company (sole proprietorship or partnership or others) must be provided in the company’s summary as a quick snapshot of what the enterprise is and how it is managed. Industry analysis The industry analysis provides a critical view of the industry of the new business. It will be required of the entrepreneur to provide clear-cut and incisive analysis of the type and model an idea will fit into prior to embarking on the business. Some questions will require honest answers in providing sound industry analysis for a new business. These questions include; Ø In which industry will your company operate? Ø What is the size of the industry? Ø Who are the major players in the industry? (customers, intermediaries/suppliers, etc) Ø How mature is the industry? Ø Who are your competitors and what are their strengths and weaknesses? Ø What value is your proposed business bringing into the industry? Ø What challenges would your business face in entering and staying in the industry? Ø How would you assess the performance of your company in the industry? While there is confidence in the hearts of new entrants, the entrepreneur must recognise that the industry has been existing prior to his/her own idea and a critical assessment of the above questions will aid in guaranteeing the success of the business. Market analysis There are many aspects of market that need to be covered in your business plan. It is essential you briefly outline what the market you compete in or propose to compete in is. Define this market and explain it thoroughly. There may be a population in a giving geographical area but that does not necessarily create a market. For you to gain a section of the market, your product must provide all or some major part of the factors sought out in the product. The next thing is to describe your customers. Are your plans based on the demography of an area; to what extent are you capturing all age groups and social strata? Describe how big the market is. This provides a clear understanding on the market share you anticipate taking. The market structure must equally be explained as it is the material to assessing the attractions of your proposal. Retail bookselling is a fragmented market while a supermarket already has a handful of huge competitors. In either instance, you must be able to provide strategies that will guarantee your ready entrance into the market. One key point in market analysis that must not be overlooked in the market is the competitors. Avoid the common error by educated entrepreneur which is to assume that your education will carve out a market for you. Education, as far as business is concerned, only improves critical level of reasoning or doing things. Do not underestimate the capacity of a fairly educated business person who has lived his/her lifetime thus far within a business setting. Thus, an objective description of what you know about the strengths, weaknesses and their means of operation is required. New entrants into a business must recognise the huge sacrifice involved in growing a market and be ready to pay appropriate price for such a growth. The ‘marketing mix’ is often described as comprising of 3C’s and 4P’s. The 3C’s connotes customers (decide values and needs), competitors (compete for market and values) and company (at the centre of creating values) and the 4P’s connote the product (must be attractive and satisfying), price (must be attractive), promotion (the exact market strategy to gain a portion of the market) and placement (delivering product or service to the customer through appropriate sales strategy). You may need to provide the trends observable in your market and what changes you anticipate can occur in the near future. Customers are known to change value and to migrate in terms of their loyalty to a particular product or service. Thus, trends must include information on market size, prices, competition and technology. An entrepreneur targeting dressing patterns must have adequate ability to predict the trends in fashions of men, women, boys and girls over the next few years in order to remain relevant in the market. Personnel strategy Clearly describe your human resource and staffing at the initial stage and how it would grow over time. Give the background of your staff members and the skills each member is bringing to the team. If there is a need for an advisory board of directors, describe the members you have appointed and why. Include a clear organisational chart and your management strategy. Show the ownership structure of the business and percentage of each partner. Financial factors In some instances, it might be necessary to engage a financial expert for this part of the plan. However, there are some essential parts of the financial factors that must be kept under control and the entrepreneur will be the determinant of the financial strategy. The amount of financial information that will be required in a plan will vary with circumstances and depends on some factors. The size and complexity of the business, clearly a huge and complex business requiring a large investment will demand a great deal of financial details to attract partners and financiers. If the business is already trading, it will be required to provide at least up to three-year’s financial accounts. It is very important to include forecast figures alongside the historic figures. There are four elements that may be covered in the financial data: profit and loss account, balance sheet, cash forecast and funds flow.The general rule of the financial component of a business plan isthateverything must hang together. There must be a clear financial link between the vision and strategies, market growth objectives, business and sales models, margin percentages, cost of goods, and the expenses must reflect standard percentages. Some pertinent questions to be answered in this part of the business plan are: Ø What will it cost and how would you finance the business? Ø Are you capturing all costs? Ø How will you get your start-up capital and possible sources of financing start-up and expansion (various financial sources have conditions)? Ø How would you make money, when do you expect to breakeven and when do expect return on investment (ROI)? Ø When would the business begin to make profit? Ø Are your assumptions realistic? Ø What is the projected profit over time? Ø How will the profit generated be used?
Implementation strategy Have timeline implementation strategy (1 month – 1 year), medium term (1 year to 5 years) and long term (5 years to 10 years). Implementation strategy should identify key operational and financial milestones; e.g., when will the first product hit the shelf; when will be company breakeven, etc?Theimplementation plan gives credibility to the business plan. Sales strategy is another component of implementation strategy. The sales strategy will require a sales plan. What is your Sales strategy?What standard channels will you use?Is there an innovative channel?What are your penetration tactics?What is your sales model?What are your hiring & training plans?What are your measurement and reporting? It might also be important to provide as part of implementation strategy the necessary research and development proposals and the engineering details if required. What are your core technologies (provide sufficient, but not numbing details)? What is your development status (describe your primary milestones, be conservative, assume development will be late)?Detail the technical team’s background.What is your strategy for future products (Define in text with graphics your roadmap, and define common platforms and architectures)?What are your intellectual property and patent strategy (What is your IP strategy?If you have patents, provide a status table.If not, define your reasons in a positive manner). One other strategy that must be captured especially if manufacturing is involved is operations/manufacturing strategy. What’s your Manufacturing strategy (Outsource or not? Why & why not?). What is core in Manufacturing?What are your unique capabilities? What are your unique processes? Sources of information for developing your business plan The entrepreneur or consultant preparing the business plan must always remember that the investment capital for the business may be someone’s gratuity and or entitlements from long years of service in a previous paid employment and therefore must be factual and realistic in the information used in preparing the business plan. Credible information can be found out through personal experience; you may also carry out many of the estimates and calculations. But some information may be difficult to find and some estimates and calculations may be difficult to make. It is therefore helpful to have someone with experience in the particular area of business to assist with reliable information and or to review the business plan. The following are possible sources of credible and reliable information: i) BDSPs: Business Development Services Providers otherwise also known as consultants offer different services, such as management training, access to market information, access to financial information and technical training. ii) Government departments: Specialist projects or other non-governmental organisations. iii) Industry specific associations: Thesewilloffer information on legislation, taxes, standards and other industry specific developments that might have an effect on the new business. iv) Accountants, lawyers and business consultants: These are professionals who can assist with legal, regulatory and information relevant to critical sections of the business plan. v) Financial institutions: Institutions such as banks, cooperative societies or microfinance institutions are veritable sources of data; they sometimes provide assistance to entrepreneurs seeking funding. vi) International Organisations: There are organisations with special projects designed to assist entrepreneurs; they hold very useful information. vii) The internet: One can find most of the information required to complete the business plan on the net. Also available are data and details such as addresses of organisations handling things like businessregistration, taxes and financial requirements for small businesses, competitors, suppliers, etc. viii) Libraries: A good library is a great source of information on several aspects of developing a business plan. ix) Market research: most of the information sources earlier mentioned will provide secondary data, which of course has its uses; however, current information on the subject of the business enterprise should be diligently sought through market research to obtain useful primary data. Market surveys may cover the following among others: - Customer surveys: A customer survey is probably the most important source of critical information in writing a business plan; it will reveal who the customer is, customer needs, interests, possible price levels, etc. - Product surveys: Product surveys show possible interest in a product, preferred sizes, price levels, ‘look & feel’, etc.
Guiding principles of developing a business plan Many business plans fail to meet the intended objectives. The main reason is that there are key starting assumptions in writing a business plan which many entrepreneurs overlook. A business plan in itself is not budgeting; it does not guarantee success without detail attention to what investors look out for and the preparatory tasks required of the entrepreneur. Principles, generally, are accepted or professed rule of action or conduct; or an adopted rule or method for the application of intended actions. They are fundamental truths or propositions that serve as the foundation for a chain of reasoning. The following principles are considered very relevant to the development of business plans: i) Integrity: It is tempting to assume that one knows all that there is to know on a subject and therefore use old, imaginary, fabricated and or doctored data to develop a business plan.This will definitely cause a lot of harm to all concerned. A worthwhile business plan must be based on verifiable and authentic data. Without data integrity, the plan is worthless. ii) Discipline: Writing a business plan requires disciplined balance, and a series of contrasting demands of being visionary, yet logical; financially perfect, but flexible; relevant for today, and also for the next 3-5 years. While the business plan should be creative, it is also required to be subject to its basic principles and rules. iii) Preparation – The key to success: In developing the business plan, the use of creative imagination cannot be over-emphasised, attention must be paid to details and many questions must be answered, such as: what the entrepreneur and the business visions are and how to communicate it to others; clarity about the core business and its sustainability over the future; what role innovation is going to play in the business, etc.There is the need to make projections into the future about the possible product life cycle, product evolution, customer evolution, changes in technology, and competitors’ reaction, among others.Enterprises operate within given economic spaces, which are characterised by some indices; the business plan must therefore show understanding of the impact of the economy on the business in the immediate and near future. Subjects of interest will include factors such as, the prevailing economic trend, market dynamics, regulatory requirements for the present and future, etc. Internally, projections are required for expected revenue growth, target margins, level of indirect costs, financing models, credit policy, etc. iv) Compelling: The executive summary of the business plan, though may be only a few pages usually determines whether the document will be read or not!Eachbusiness plan has a target audience, be mindful of this, understand what their interests may be and address them boldly and credibly. Do not assume anything!To attract the right attention, the executive summary must be compelling! It must be brief, yet with enough indications of a highly rewarding and fulfilling venture. It must be gripping and ‘difficult to put down’.Having a ‘triple bottom line’ is exciting and can be the defining factor sometimes. It should show how what exactly the business and the business model are, along with the sales model, channel strategies, including the e-commerce strategies. v) Credibility: It is very important that the business plan is credible, a lot more than money is at stake in a start-up, or new business.Demonstrate the relevance of an objective customer research and avoid making unsubstantiated statements or creating unrealistic revenues that cannot be achieved.Evidence of genuine and truthful market research and hard data properly presented give a lot of credibility to the inferences and recommendations made in the business plan. A winning business plan must show an experienced managementteam to execute it. Every plan has threats to its execution; perceived threats to your business plans also improve its credibility.Thebusiness plan is best presented in proven and generally acceptable formats, please recognise this and choose wisely. vi) Flexibility: The data collected and used in the development of the business plan, though diligently sourced, however, because they are from a dynamic environment, one may find that, by the time of execution, some of the indices may have changed. The business plan must therefore be built on a model that is flexible enough to accommodate changes to any of the indices.This is achievable by understanding the linkages between all the components of the plan and the way they impart each other. vii) Realistic: The projected outcomes in the business plan must be realistic and exciting. It must demonstrate its uniqueness, especially by recognising growing markets segments and showing their impact on the plan. The risks, barriers to entry of competitors, and threats to the enterprise should be acknowledged and appropriate responses clearly stated. Consider and answer the question of why customers buy, demonstrate to your reader that success is assured and state how much money you will need and how the funds will be used. Avoid a drawn out preparation period which may make the plan obsolete even before it is completed. viii) Futuristic: Decision makers reading the business plan are interested in seeing relevant data to aid their decision, therefore, do not focus on yourself, your intended technology, or the use of technical buzz words or abbreviations that may be known only by you.Focus on the future and state your exit strategy clearly. ix) Easy to read: Do not include detailed budgets, it can be distracting, and avoid defining valuations in the actual plan; and do not include copies of resumes and technical papers. Let your choice of font type and size bereader-friendly to the reader. A final word on the principles of writing a business plan, there are so many components to this document, it will be foolhardy to try to write it all alone. Engage other people to give new or other perspective to the project at hand. Once completed, have the document read over and over again before presenting it to the target audience. Developing an appropriate business model – using the BMC According to Peter Drucker, in Magretta (2002), a business model, as defined in his Theory of the business is considered as the “assumptions about what a company gets paid for”. Magretta (2002), states that the business model is at heart stories — stories that explain how enterprises work. A good business model therefore answers Peter Drucker’s age-old questions-Who is the customer? What does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost? A business model has two parts: Part one includes all the activities associated with making something: designing it, purchasing raw materials, manufacturing, etc. Part two includes all the activities associated with selling something: finding and reaching customers, transacting a sale, distributing the product or delivering the service. Creative and innovative ideas are expected to be solutions to identified problems or needs. An idea becomes an opportunity when there is a corresponding customer need; an opportunity is delivered by a good business model. In reality, a business model comprises choices and consequences. Osterwalder and Pigneur(2010),see a business model as a set of assumptions, and developed what is arguably the most comprehensive template on which to construct those hypotheses. His nine-part ‘business model canvas’ is essentially an organised way for you to lay out your assumptions about not only the key resources and key activities of your value chain, but also your value proposition, customer relationships, channels, customer segments, cost structures and revenue streams.
Fig. 8.1.Osterwalder and Pigneur’s(2010) business model canvas - template The three key characteristics of a good business model (Casadesus-Masanell,2011) i)Alignment to company goals:The choices made while designing a business model should deliver consequences that will enable an organisation to achieve its goals. ii)Self-reinforcing:The choices that executives make while creating a business model should complement one another; there must be internal consistency. When there is lack of reinforcement, it is possible to refine the business model by abandoning some choices and making new ones. iii)Robust:A good business model should be able to sustain its effectiveness over time by fending off four threats of imitation (can competitors replicate your business model?); holdup (can customers, suppliers, or other players capture the value you create by flexing their bargaining power?); slack (organisational complacency); and substitution (can new products decrease the value customers perceive in your products or services?).
Understanding and using the business model canvas The business model canvas is a strategic management and lean start-up template for developing new or documenting existing business models. It is a visual chart with elements describing a firm's value proposition, infrastructure, customers, and finances. It assists firms in aligning their activities by illustrating potential trade-offs.Abusiness model is more than just your idea, it is how your enterprise will create, deliver and capture value as defined by the entrepreneur – it can be economic, social or other forms. Osterwalder and Pigneur (2010) suggest that there are nine building blocks to a business model. These blocks show the logic of how a business intends to make money.These nine building blocks map onto the four main aspects of a business – customers, the offer/product/service, the infrastructure and financial viability (Gibb and Scott, 1985)
Business plans development The business model is what makes the business sustainable, and successful! Many entrepreneurs make the twin mistakes of trying to build a company before building their business (they are different from each other), and or designing a product, and then seeking customers for the product! As we will learn from the nine building blocks as proposed by Osterwalder and Pigneur (2010), the journey starts from identifying the customer needs to meet.
Fig.8.2: Osterwalder and Pigneur’s business model canvas - example
The nine steps of BMC i) Customer segments: which customers and users are you serving? What needs, jobs, problems, etc, do they really want to meet or solve? ii) Value proposition: what solution are you offering them? What is that getting done for them? How much do they care about this discomfort? iii) Channels: how does each customer segment want to be reached-through which interaction points? iv) Customer relationship: what relationships are you establishing with each segment–personal; automated, persona,acquisitive, or retentive? v) Revenue streams: what are customers really willing to pay for? How are you generating transactional or recurring revenues? vi) Key resources: which resources underpin your business model? Which assets are essential? vii) Key activities: which activities do you need to perform well in your business model? What is crucial? viii) Key partners: which partners and suppliers leverage your model? Who do you need to rely on? ix) Cost structure: what is the resulting cost structure? Which key elements drive your costs?
The BMC is a tool useful in laying out the business model for a prospective enterprise.Take time to think through alternative possibilities. The same technology, product, or service can have numerous business models, try sketching out alternative business models by asking yourself what choice to make between competing options of these and otherslike:transactional vs. recurring revenues; fixed vs. variable costs; one customer segment vs. another; capital expenditure vs. partnership; product vs. service; human intensive vs. system intensive; niche market vs. mass market; scale vs. scope; blue ocean vs. red ocean; physical vs. virtual.It is recommended to consider the different options - prototyping and thinking them through - before deciding on the final choice.
7.11 Case studies The two case studies considered in this section are current unending arguments as to the need for a business plan. You are expected to present your own opinion judging from the advantages and disadvantages of creating a business plan. Case study 1 - Real entrepreneurs do not write business plans - Francesca Di Meglio Entrepreneurship is about getting out into the world and doing - not simply researching and writing business plans. Steve Blank pities those poor professors stuck teaching tired business plan courses. “I’d be embarrassed if I was on a faculty teaching ‘How to Write a Business Plan for New Ventures,’” says the serial entrepreneur turned business school professor. Blank is at the forefront of a growing movement of B-school professors teaching the next generation of Mark Zuckerbergs. Entrepreneurship, he argues, is about getting out into the world and doing. “Business plan classes and business plan competitions are dead in the water for new ventures,” says Blank, who authored the cover story in the May 2013 issue of Harvard Business Review on the value of experimentation in building a new business. The premise of Blank’s course is that aspiring entrepreneurs need to know their customer and must test their hypotheses to have any chance at success. In the three years that he has taught Lean LaunchPad, Blank has reached about 150 teams of students. The teams start building a product or service at the beginning of the class, and then immediately go out and talk to 10 to 15 people per week to test their theories about business challenges, such as pricing. His students learn from their failures and grasp the true meaning of pivoting or changing to meet the needs of clients, he says. “You used to have a revenue plan, and you’d execute to the plan because it was written down,” Blank says. “When it didn’t work out, you’d fire people. Now, we fire the plan.” Blank grades students based on weekly presentations about what they have learned from their field research. The program is an open-source course, including the student’s presentations, which are filmed and put online as well. Blank’s ideas about how to teach entrepreneurship are spreading. About 75 professors per quarter get trained on how to teach the Lean LaunchPad course. The National Science Foundation (NSF) adopted the program to help scientists turn their ideas into businesses, and it had Blank teach the first class of 25 teams in October 2011. Now, 11 universities are teaching 400 to 500 teams of scientists a year for the government. In the new course, students pitch business ideas, and their peers vote on which ones to pursue. Students whose ideas are voted down must negotiate a contract with one of the remaining businesses. As the course progresses, businesses are voted off until only a few remain at the end. In addition, students earn “Karma Points” by participating in challenges, such as one where they must seek out someone with a high Klout score - a measure of social media presence - and ask for advice. The student whose business earns the most money gets an A, as does the one with the most Karma Points. Abigail Zaniel, a first-year student at Smith who took the course, managed Schmoozies, a business that sold customized can insulators. “I learned to actually start a business, you have to live and breathe it 24/7,” she says. “I found myself waking up thinking about how to grow the business. Case study 2 - How many entrepreneurs really need a business plan? - Martin Zwilling On a regular basis, I am approached by entrepreneurs who assert that business plans are a waste of time. They cite sources like a recent BusinessWeek story, “Real Entrepreneurs Don’t Write Business Plans” and this article. From my perspective as a professional investor and long-time advisor to entrepreneurs, much of this urban legend advice is just plain wrong. Of course there are scenarios where a written business plan is not critical, but I have not seen one yet where a well-written 15-page document, or at least a 10-slide pitch, is a negative. Let’s look at some common scenarios, and put this into perspective for entrepreneurs: 1. You don’t need or want investors or a loan. With bootstrapping, no business plan is expected by anyone. Yet I would suggest that creating one is still a valuable exercise, since you need the plan as the blueprint for your company, team communication, and progress metrics, unless your management style makes this a waste of time. 2. You have built a successful start-up, and plan to use the same investors. If you have a proven track record, investors don’t have to see a written plan to believe you can do the job. In fact, they are probably in such a hurry to give you money that they don’t want you to waste time writing anything down and passing it along to new investors. 3. You need funding, and plan to get it from friends and family. Hopefully you know your friends and family better than I do, so you decide when a business plan is required. If your rich uncle is an accountant, or has his own business, I recommend a good business plan. On the other hand, your mother probably won’t read one. 4. You need an investor, and want a document to mass-mail to everyone. Creating a business plan for this purpose is a waste of time. In fact, the whole process is a waste of time. Most VCs and Angel investors don’t read unsolicited proposals, unless they have met you first, or have a glowing recommendation from another investor or acquaintance. 5. You need money, and plan to do crowd-funding. Although technically the major crowd funding sites today, including ‘Kickstarter’ and ‘Indiegogo’ don’t request a business plan, they do require essentially the same information in a project format. Thus building a business plan ahead of time will improve your application and chances of success. 6. You need an investor, and want to solicit professionals online. Major platforms are available online to find Angel groups or VCs, including ‘Gust’ and ‘AngelList’. These platforms, and every investor who uses them to find entrepreneurs, expect to find a good business plan posted. You won’t even be considered without a business plan. 7. You find an interested investor, and need to close the deal. Most professional investors, even if they like your story, and were properly introduced by a friend, will ask for a business plan at the due diligence stage. They want to see if you have done your homework, have reasonable expectations, and are willing to commit to something. You might fairly conclude from these points that a business plan is only “required” if you want to seek funding from professional investors who do not already know you or know your track record. On the other hand, do not forget Angel investors, who fund 60 times as many start-ups, to the tune of $20 billion last year, who start their search primarily from platforms like the ones mentioned above. A business plan may be a small investment to get a shot at that opportunity. For the rest of you entrepreneurs, consider the value of a business plan when it is not required. Clemson University professor William B. Gartner looked at data a while back from the Panel Study of Entrepreneurial Dynamics, and found that writing a plan increased the chances by two and a half times that a person would actually go into business. Of course, building a plan is not an alternative to getting out there and doing something. There is no substitute for knowing your customers first hand and iterating on a minimum viable product to find the most marketable solution. Writing it down promotes both understanding and commitment. Overall, I sense that not writing a business plan is more often an excuse rather than a time saver. Building a business is a long-term non-trivial task, like building a house. Would you give money to someone, without a plan, who had never built a house before? Hopefully you would not even build your own house without a plan. You should treat your new business with the same respect.
7.12 Summary As we have learnt in this chapter, a business plan has some clearly defined objectives that an entrepreneur must not miss. Some of the objectives of a well-written and laid-out business plan are to attract investors, to see if your business ideas will work, to outline each area of the business, to set up milestones, to learn about the market, to secure additional funding or loans, to determine your financial needs,to attract top-level people,to monitor your business andto devise contingency plans. The business plan is the main document often required by all and in particular investors to provide the alternative strategy should the business fail. One key area captured in a business plan is the exit strategy and this has the objective of providing a mechanism for sharing both the liabilities and assets of a successful or failed business. It is often recognised that a business plan provides the following advantages; it forces you to identify with your (and your company’s) strengths and weaknesses, it gives you clear direction. A business model is more than just your idea, it is how your enterprise will create, deliver and capture value as you define it. A business model has two parts: The first part relates to all the activities associated with making something: designing it, purchasing raw materials, manufacturing, and etc. The second part presents all activities associated with selling: finding and reaching customers, transacting a sale, distributing the product, or delivering the service. Writing a business plan is recommended for start-ups, and existing businesses of any size going into new products or ventures. 7.13 Review questions 1. A business plan is a written document that describes a. a business, its objectives, and strategies b. the market it is in c. its financial forecasts d. all of the above 2. The following are possible sources of credible and reliable information: a. BDSPs b. Government departments c. Industry specific associations d. a, b& c 3. The following principles are considered very relevant to the development of business plans except: a. Integrity b. Discipline c. Preparation d. Unrealistic 4. Objectives of a good business plan include the following except: a. To convince investors that your business ideas won’t work. b. To learn about the market and to secure additional funding or loans. c. To determine your financial needs and to attract top-level people. d. To monitor your business and to devise contingency plans. 5. A mini-plan is all but one of the following a. Contains less emphasis on critical details b. Is used to test your assumptions and concept c. Is a detailed and comprehensive document d. Is used to measure the interest of potential investors
Short Essay Questions 1. State and explain five key terminologies commonly used in business plan development 2. Compare and contrast – ideation and fruition 3. Explain the differences between business plan and feasibility study 4. Using the BMC, design a sustainable business model for an enterprisein your field of study. 5. Working in groups of four, each group is to write a BP-Lite on a business idea that can be executed on the campus.
7.14 References and suggested further readings Casadesus-Masanell, R. and Ricart J. E. 2014.How to design a winning business model. Harvard Business School (HBR January–February 2011). Drucker, P. F. 1994. The theory of the business.Harvard Business School (HBR September – October 1994).
Finch, B. 2010.How to write a business plan. London: KongaPage Publishers.
Gumpert, D. E. 2003. How to really create a successful business plan.4th Edition.Massachusetts: Lauson Publishing Company.Needham Heights, 687 Highland Ave.02494-2232,
Judy C. and Anwar R. 1996.Feasibility studies can help you control your destiny.Americanmedical news. 23 September.
Magretta, J.2002. Why business model matter. Harvard Business School (HBR May 2002).
Osterwalder, A. and Pigneur, Y.2010. Business model generation: A Handbook for Visionaries, Game changers, and Challengers. New Jersey: John Wiley & Sons Inc. Hoboken.
Phillips, J. 2003. PMP Project Management Professional study guide. Emeryville.McGraw-Hill Professional.McGraw-Hill/Osborne, California, U.S.A.
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