business plan mds_eng copy

8/2/2019 Business Plan MDS_eng Copy

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Business PlanningMASTER in STRATEGIC DESIGN


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GENERAL OBJECTIVES AND CHARACTERISTICS OF A BUSINESS PLAN

A business plan is a document that is typically used to develop a business idea be it in

its START UP PHASE, or to formally define and analyze NEW BUSINESS STRATEGIES for

an already existing company (i.e. to develop and launch a new products, services, or

communication elements, enter into new unknown/niche markets, a potential joint-

venture or partnership with other firms or even competition etc)

A business plan should be considered as a DYNAMIC TOOL that must be continuouslyupdated in terms of its hypotheses, business conditions and previsions (economic,

market, operative etc) and scope. More specifically, a business plan can be used:

Internally by a companys management or start-up team to evaluate thebusiness initiative, or;

Externally by potential investors, (institutions, partners or other entities thatmay be interested in investing in the business initiative) that must evaluate the

new business venture.

A business plan can also be categorized according to different objectives:

PLANNING OBJECTIVES

Formally analyze the business initiative from a quantitative and qualitativebusiness dimension;

Allow to anticipate possible critical issues involved in the business initiativesdevelopment

Allow to formally structure and plan the activities that need to be conducted inorder to develop and maintain the business initiative

Allow the identification of the necessary resources that are need in order todevelop and maintain the business initiative.


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Allow to give an overall business evaluation of the initiative for eithermanagement or potential investors

CONTROL/UNDERSTAND/LEARNING OBJECTIVES

This objective is typically adopted when the business plan, as a tool, is used to

evaluate a strategic decision of an existing company. In fact, using the business plan

as a control mechanism for this strategic decision, it is possible to view it as an

instrument that analyzes the changes and variances of its output, and can act as a

learning tool that can support the decision making process.

COMMUNICATION OBJECTIVES

If the business plan is developed for a start-up operation, then it can be used as a

communication tool for potential partners, investors, institutions and/or

clients/suppliers. Instead, in the event that the business plan is developed to support a

strategic decision of an existing company, the it can be used as a communication tool

for internal/external investors, board of directors, management as well as institutions.

BUSINESS PLAN STRUCTURE

The typical structure of a business plan can be divided in the following chapters:

1.Table of contents2.Abstract3.General company description4.Detailed description of the business idea/new venture/new product/service etc.5.Strategic Plan6.Marketing Plan7.Operating Plan


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8.Organization Plan9.Financial structure related to the business idea10.Economic/financial forecast/plan

TABLE OF CONTENTS

The general characteristics of a business plans table of contents should be:

High degree of legibility (Structured on various hierarchical levels to facilitatereading),

High degree of informative and coherent content Clear and concise

1. ABSTRACT

The structure of a typical business plan abstract should NOT exceed 2/4 pages, and

must contain enough detail to allow a transversal reading of the business idea in a

brief period of time. In particular, the abstract should clearly and concisely articulate:

The business idea in terms ofo The stakeholder needs that it will satisfy (i.e. stakeholder needs are those

needs that may be explicit or latent in society, that may exist or may

need to be created in order for the business idea to make sense and

satisfy);

o The product/service it intends to develop/offer;o Its users and its underlying market.

The competencies/resources that are necessary for the development of the business idea. In fact, the reader of the business plan must be able to

immediately understand how many existing AND potential resources arenecessary for the development of the business idea in terms of:


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o Human resources;o Licenses/patents;o Brands and other complementary assets.

The business ideas financial-economic forecast/plan in terms of ROE, ROI,IRR, and revenue (better to illustrate these using tables and graphs);

The objectives of the business plan (I.e. sell 20% of the companys sharesover the next 5 years, increase sales by 30% in the next 5 years, or obtain a

market share in Italy and become market leader by 2010).

Aside from this aforementioned content, the main characteristics/levers that one must

consider while structuring the abstract are

The abstracts style and appeal: it must convince its reader of the strategicnature and attractiveness in 2/4 pages;

Must emphasize the business ideas strengths and opportunities whiledownplaying its weaknesses and threats

Must be authoritative in its information, data and analysis. In fact, it shouldconvey a consolidated, accurate and reputable nature (I.e. data obtained from

AC Neilsen, Istat, Global data etc., analyses conducted from reputable and

qualified individuals etc.)


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2. GENERAL COMPANY DESCRIPTION

This section of a business plan focuses on describing the characteristics and structure

of the company/start-up that is involved in the development of the business idea at

hand. The main objective therefore is to sufficiently describe the external and internal

configuration of the company through the use of various positioning models such as

Abells model, the BCG Matric, the GE Matric etc., and structural models such as

Porters value chain so as to be able to communicate the companys:

Competitive positioning (Abells model, BCG Matrix, GE Matrix). Whateverthe tool used to communicate the competitive positioning of the company and

its products/services, the fundamental characteristic is to identify how the

company, (including its portfolio of products/services) are currently positioned

on the market

Value chain configuration according to Porter. Here the central focus is todescribe the companys macro value chain configuration/activities along the

entire value chain emphasizing its strengths and weaknesses in each activity.

(I.e. the strength of IKEAs distributive and sales activities is key to the current

positioning of the company).


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Current vision, mission, creed and objectives in terms of its current strategicplan. (I.e. cost leadership position on the market, )

Entrepreneurial composition. In particular, the general company descriptionshould evidence the following aspects:

o Past successes/experienceso Competencies (explicit, tacit etc)o The companys strengths and ability to innovate

These factors should be considered and emphasized in this section of the

business plan if they are strengths and offer potential advantages for the

development of the business idea that the next section will describe.


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3. PRODUCT SYSTEM DESCRIPTION

1 Detailed description of the product system and how it functions from the variousstakeholder perspectives:

The objective is to clearly describe the concept and its resulting product system in

detail so that the person reading the business plan (Upper management, Board of

Directors, entrepreneur, manager, investor, bank etc.). As the objective is to clearly

describe and explain the merits and advantages for the development of the business

idea from a product system perspective, it is fundamental to articulate this part of the

business plan in a convincing and original manner in order to attract the reader.

Consequently, it is paramount to support the business initiative with the documents,

diagrams, flow charts, analyses and other types of information that can convince the

reader. (I.e. prototypes, mock ups etc.)

23In this section, it is also paramount to distinguish the product system/business initiative

from the existing product offers on the market. This, for two reasons: (1) to illustrate

that the team has enough knowledge of the context, the stakeholder needs, and the

current business offering, and what the future has in store for the product system. (2)

To illustrate how the product system differentiates itself from the rest of the

products/services on the market. Consequently, it is important to benchmark that

various critical factors of the business idea with the current business offerings and

clearly demonstrate the strengths and weaknesses of the proposed business initiative.

Potential selling points could be:

Quality of the product/services Conformity of the products Efficiency (delivery timing etc) Service level Range of products/services rendered


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Brand equity/image Price (related to the cost structure needed to offer the product/service Potential future technological developments Development of standards or other dominant characteristics of the

product/service


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4- STRATEGIC PLAN

4Objective/ Mission of the company/initiative/product system5Internal analysis

the objective of the strategic plan is to identify and analyze the strengths and

weaknesses of the product system. There are many different methods and tools that

can be used, but the most utilized are:

Value chain analysisThrough the use of the Porters value chain analysis, the company is broken down

into a series of processes that can be subsequently analyzed in terms of strengths

and weaknesses. For example, some possible strengths and weaknesses could be

associated with different types of primary or secondary activities such as:

Marketing: in terms of brand image, market share, perceived quality of theproducts/services offered, distribution costs, geographic reach of the company

etc.

Production: in terms of machinery and factories, economies of scale andscope, production capacity, specialized work force, speed of delivery etc.

Organizational: in terms of leadership abilities, intuition, motivation, and otherorganizational variables.

Resources/Competencies that could be a source of sustainable competitiveadvantages such as:

Imitability Substitutability Appropriability Durable Competitive superiority


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External analysis:

The first thing to do in terms of an external analysis is to chose a reference point

(more specifically, this could be a reference industry, sector, or business). Once

accomplished, one typically begins by:

Analyzing the attractivity of the sector (i.e. average long term returns for the chosen

reference industry/sector etc). More often than not, companies typically only look at

their direct competitors in order to understand the attractiveness of the sector. This,

however, is a very limited view that can lead to misconceptions/misleading activites.

To have a more complete view of the attractivity of the, one can use Porters 5 forces

model illustrated below.

In particular, using this type of model, we can better comprehend the potential

sources of competitive advantage for each of the forces under examination:

Substitute products: A typical example of a substitute product is the example ofthe anti-theft alarm systems (burglar alarms) and vigilance services. Physically the

two products are completely different, but, since the evidently satisfy the same

needs, it is necessary to define the performance levels of each and evaluate their

substitutability in terms of market acceptance, share, value etc.

Potential entrants: the threat of potential entrants is indirectly proportional to thenumber of entry barriers that exist that can block the entry of potential new


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competitors. Some potential entry barriers could be the present due to economies

of scale/scope, brand equity, financial investments, the existence of

complementary assets (i.e. distribution channels), the existence of standars or

dominant designs etc.

Direct competitors: this type of threat is very much conditioned by the number ofcompanies that are present in the industry/sector and by the similarity of the types

of products offered by the companies. In fact, the larger the number of companies

and the more standardized the type of product, the more we reach the state of

perfect competition in which the price of a product coincides with its production

cost.

Suppliers/clients: the reasons for a greater bargaining power on behalf ofsuppliers/clients are mainly due to:

The degree of concentration of a sector/industry. (I.e. if we look at theautomotive industry, and in particular, to the automotive component suppliers

Vs the Automobile producers, given that the number of automotive producers

are much less than the number of automotive component suppliers, the formerare able to take advantage of their bargaining power in order to get the lowest

prices possible for their components.

The type of purchased product: I.e. the bargaining power of a producer ofcarburetors is higher than the producer of the interior wooden panels of an

automobile since the first is a more important determinant of the overall

perceived quality of the finished product);

The cost percentage of the component with respect to the overall cost of the product. I.e.. A producer is able to negotiate better prices of products that

account for 90% of the total cost of a finished product than that of a component

that accounts for ony 10%;

The standardability of a product (I.e. the bargaining power of a producer of astandardized product that can be adapted to different types of other products is


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higher than that of a producer of a product that has a unique interface that is

limited in its applicability or adaptability.

The degree of knowledge that the producer has of your cost structure. In fact,the more transparent a cost structure, the less bargaining power one has over its

suppliers or clients.

The analysis of exogenous or external variables that may impact theinitiative/company. For example, a useful analysis is the PEST analysis in which

one tries to understand the Political, Economic, Social and Technolgoical contexts

in which the initiative/business idea/product or company will operate.

The chosen strategic direction: is the final result of a normal strategic plan of a

business plan, which will be better described and interpreted through the other parts

of the business plan. In particular, the parts of the business plan that will describe in

more detail the chosen strategic direction are the Marketing and Operational plans.

Possible strategic directions are cost leadership, differentiation and focalization(defined by Porter).

Cost leadership: the objective of this strategy is to minimize the costs ofproduction and distribution in order to be able to offer the lowest possible prices

to ones target audience. To adopt this type of strategy, a company needs to focuse

on the ability to design, purchase, internalize competencies, produce and distribute

its products/services in the most efficient manner possible taking advantage of

possible economies of scale and scope that can result from the day to day

operations of a company. Less important to this type of strategy is the marketing

strategies of a company. (I.e. Texas Instruments is a prime example of a company

that took most advantage of their cost leadership position in the market)

Differentiation: the main objective of this strategy is to create a product lineup anda marketing plan that is able to differentiate the explicit and intricate values of the

products that the company offers so as to be able to be perceived by the target


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audience as industry leaders. The distinctive abilities to implement such a strategy

are R&D and design investments, quality control and marketing (Ex. IBM,

Caterpillar)

Focolization: With this strategy the company focuses its operations on only a fewsegments of the market. Of particular importance to these companies is the ability

to understand the explicit and latent needs of their niche market and develop the

competencies to design, develop, market and distribute their products accordingly,

(Ex. Ferrari, Ducati)


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5. MARKETING PLAN

In defining a marketing plan for the developed business idea and strategic direction,

one has to:

1. Analyze and evaluate the potential markets by identifying, quantifying andevaluating the target segments of the business idea.

2. Define the marketing strategies (definition of the various marketing levers thatcan be used Marketing Mix Product, price, place, promotion)

3. Forecast the market demand in order to understand the dynamics of the chosentarget segment so as to be able to measure how much of it the company that

will be developing and offering the product/service will be able to satisfy. This

is an extremely important to measure given that this data can have enormous

impacts on the accuracy and precision of the business plan.

5.1 Analysis and evaluation of the potential market:

To analyze and evaluate a potential business ideas market, one has to:

Understand and evaluate the reference market of the business idea from a currentmarket situation as well as from a market trend perspective (market opportunities).

This market analysis is in fact fundamental data/information for:

Finance (defining the present and future cash flows necessary for theinvestments that can be made);

Production (defining the productive capacity needed to satisfy the evaluatedmarket);

Procurement (determining the type and quantity of raw material needed tosatisfy the production requirements etc.);

Personnel (defining the amount of work needed to be done, and therefore alsothe number and type of people/professionals needed to transform the business


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idea into reality.

SEGMENT THE MARKETMarket segments are homogenous groups of people that are part of a particular

potential market. Consequently, it is paramount to define different segments of the

potential market that the business idea will try and satisfy in order to be able to

define the quantity, quality and timing of the marketing plan in order to take full

advantage of their communication, promotional and selling tasks. The more

traditional types of segmentation strategies are:

Geographic: one can distinguish between nations, regions, provinces etc. (I.e.Maxwell House coffee produced by General Food that is commercialized

throughout the United States with different types of coffee blends depending

on the coastal desitination)

Demographic: with this type of segmentation we look at the typicaldemographic variables such as age, sex, family nucleus dimension, life-cycle,

occupation, social status, salary etc. This type of segmentation is among themost commonly used due to its easily measurable nature and the fact that

needs, preferences and habits are relatively closely correlated to these factors.

(Ex. Play Skool that organizes different product lines depending on age, the

Ford Mustang, which was originally targeted to young people, but that was

seen as a car that cut different segments freely etc.)

Behavioral/psychographic: this type of segmentation is based on the idea thatgeographics and demographics are not the only manner in which people can be

distinguished. Segmentation can also be achieved by looking at peoples

behavior, lifestyles and mindstyles.

However, irregardless of the manner in which ones decides to segment a

market, the results should have the following characteristics:

Measurable;


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Accessible: in terms of how a company is able to access the determinedsegment;

Importance: the amplitude and depth of the identified segments must beable to guarantee profitability to the company;

Practicability: the company must be able to define and implementmarketing efforts that can target the defined segments.

MARKET QUANTIFICATIONTo quantify a market, the necessary information can be obtained by:

Consulting/Service companies. The main problem related to this type of scenariois the cost associated with gathering the data related to the defined market

segmentation, which is directly proportional to the degree of specialization of the

consulting company, and the type of services that they can offer (standardized,

customized or personalized market quantification etc)

Direct observation or experience of the company or entrepreneur developing thebusiness, which he/she can obtain through: Interviews conducted to the end-users or through points of sale. The main

problem with this type of method is the time and mony that this type of

analysis takes to obtain accurate and precise information of the segment.

By analogy: through the evaluation of similar products in the same market, orproducts in other countries. The main problem with this method is when no

analogous product exists (ex. Products that may be similar but that are not

distributed through the same channels, or do not have the same price etc.)

Influencing factors such as the demographic evolution of the market or othersocial factors.

5.2 MARKETING STRATEGY


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The reference model for the definition of a marketing strategy is typically Kotlers

marketing mix (4Ps_Product, Price, Place and Promotion) or a derivative of this

model. The main objective of this part of the business plan is to elaborate a coherent

marketing strategy in which the above mentioned variables are coherently articulated

amongst themselves and with the identified and quantified market segments.

Product: For the most part, this variable of the marketing mix has already been

defined in the Description of the Product System chapter of the business plan.

However, as a variable of the marketing mix, there may be a few aspects that may

need to be more clearly defined:

General product combination: that the company intends to offer the targetaudience in terms of its amplitude (N of product lines offered by the company),

length (N of total products offered, depth (N of product variants offered in each

single product line, and coherence (the degree of variance between the various

product lines offered by the company). It is also important to delineate how the

products will evolve throughout their product life cycle in order to betterunderstand how the marketing mix will change as the product (and its underlying

industry) changes.

Product attributes: in terms of quality (durability, reliability, precision, usabilityetc.) product characteristics (defining the base product and its evolution

throughout its product life cycle) and the styling of the product (which can be

considered a personalization variable that can contribute to the definition of the

evolution of the product throughout its product life cycle).

Branding attributes: in terms of the how the companys brand equity (or lack of brand equity if the company is a start up) will affect the product value. The

development of these types of attributes, however, are quite costly, and therefore,

must be well articulated in order to be effectively managed during the business

planning period.


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Packaging: In some instances, these product attributes can be considered anextension of the marketing mix, which means that in some industries, the

packaging element of the product offering can become a key element that can

impact the degree of success the product may have.

Price: the pricing of a product/service is a key element of the product offering and

depends heavily on the strategic objectives that the company has defined in the

strategic plan of the business plan. In particular, the price will depend on whether the

company intends to follow a strategy that will allow them to:

Survive: In case of fierce competition in local and/or global markets, excess production capacity, an ever-changing consumer needs landscape or a mature

market, the company may want only to guarantee its survival. As such, its pricing

strategy will be one that is dominated by a low-price strategy in order to maximize

market share and product acceptance throughout the potential market defined in

the previous section of the marketing plan.

Maximize revenue or short-term profits: These are typically short-term pricingstrategies that allow them to take advantage of possible temporary monopoly

positions in which the company has an advantage over its competitors in term of

timing. This pricing strategy, however, is only possible when there is a strong and

accurate understanding of the demand function AND the cost function of the

company.

Maximize volumes: With this pricing strategy, the overall intention of thecompany adopting it is to maximize market penetration. To adopt this type of

pricing strategy, the company adopting it must also be willing to offer its products

at low prices in order to ensure high volume sales, which in turn mean high

production volumes, which in turn take advantage of economics of scale and

experience. In other words, for this pricing strategy to be successful, it must be

coherent with a consumer that is price sensitive for the product typology,

production and distribution costs that diminish with increasing production


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volumes, and the fact that low costs can hinder direct and indirect competitors to

compete at such low levels.

Skimming: This type of strategy is typically adopted when a company launchesonto the market a product that is superior in performance, quality and

functionality to those of its direct competitors. As such, the intention of this

strategy is saturate the market segments that are willing to buy the products at

high prices first, and then gradually move down the segmentation ladder to larger

target audiences as the price of the product falls. The main hypotheses of this

pricing strategy are that: (1) there exist a market segment that is willing to pay a

premium price of a product with better/superior performance; (2) that there are

very few economies of scale to take advantage of; (3) the absence of direct

competitors that are capable of entering onto the market with a similar product at

an inferior price; and (4) the ability of the consumer to identify the elevated

quality of the product and therefore willing to pay a premium for it.

The choice of the price of a product, however, is also subordinate to thecharacteristics of the defined market. In fact, the pricing strategy is impacted by:

Price sensitivity of the consumer. This is directly subordinate to the characteristicsof the demand defined for the product/service with particular reference to:

Price sensitivity, which is proportional to the uniqueness of the product/serviceoffered, the consumers knowledge (or lack of knowledge) of the existence of

substitute products, the quality of the product etc.)

Price elasticity of demandPlace: to determine the placement of the product, one typically needs to make two

fundamental decisions:

The choice of distribution channel in terms of typology of intermediaries,number of intermediaries and their underlying responsibilities.

Typology: by typology is meant the distribution channel of choice for thesale of the products/services offered by the company. This can be


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categorized as either direct or indirect. Based on such a choice, this means

that one can define the type of distribution agents needed (Exclusive agents,

brokers, wholesalers, detail wholesalers etc. The choice of such a

distribution channels are typically determined on the base of three criteria:

cost, control and adaptability.

For example, the motivations that can push a company to choose from

either an internal sales force or a sales force based on external agents can be

summarized in the following table.

Internal sales force Extnernal agentsCost Superior knowledge of the

product/service portfolio sold

by the company

Stronger motivation

Superior knowledge ofproduct/service portfolio of more

companies

The existence of alreadyestablished sales network

Motivation based on thecommission they receive from the

company

Control Their objective is to maximizesales of the company

Their objective is to maximizetheir profit

They are more interested in thesales of an entire package of

products/services rather than the

single product

Adaptability Greater flexibility Lack of flexibility

Number of intermediaries: Here the intention is to chose the size of thedistribution channel. One can typically chose from Intensive distribution

channels (in order to allow for a vast distribution of the products/services

offered I.e. Cigarettes), Exclusive distribution channels (in which the

company chooses for a limited distribution of the product I.e.

automobiles, white good appliances, apparel (fashion, shoes etc.), and

finally selective distribution channels (in which the intention is to take

advantage of the intensive AND exclusive distribution channels by offering

ones products/services to less exclusive intermediaries while still


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maintaining a certain degree of control on how the product will be

presented and sold).

Responsibility: here the intention is to define and determine the pricepolicies to follow (GSRP General Suggested Retail Price, Sales periods

and prices etc), sales conditions (payment conditions, warranties etc),

zoning and service policies (I.e. McDonalds guarantees its franchisees not

only a certain geographic coverage of the area of operation, but also real

estate services, bank guarantees, promotional support etc).

Sales operations: For example, the choice of the sales operations/tactics can seethe specialized points of sales (with limited, but well assorted product lineups),

retailers (many product lineups from many companies), supermarkets, sales by

post, telephone or internet, automated sales, or door-to-door sales.

Observations:

It is important to remember that the principle objective of the model is to be ableto articulate the various marketing mix variables in a coherent and competitive

manner. For example, if one decides to offer products/services for the luxury

market, it is relatively difficult to have these products/services distributed and sold

at hard-discount outlets.

It is also important to evaluate how the budget will be allocated to the variousmarketing efforts and how these efforts will change over time. An interesting

application of the marketing mix can see the application of the marketing mix

over the entire product life cycle (focusing on the most important marketing mix

variables that


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5.3 DEMAND FORECAST

The objective of this part of the business plan is to identify the penetrated marketthat the company (through its product offering) intends on reaching via the

activities delineated in the business plan.

Criticalities: forecasting demand and market trends becomes more difficult as themarket turbulence increases. As such, it is paramount to explicate the hypotheses

and the dominant market characteristics that can impact the forecasted demand.

Techniques used to forecast demand: Ask the consumer via either specialized consulting firms that typically observe

and interpret market trends, or via direct consumer contact (questionnaires,

surveys, interviews etc). This second method is relatively efficient if the

number of consumers is limited, sufficiently close and easy to reach, and have

clear purchase motivations. They are typically used for B2B products, durable

products and/or products that are new to the world for which no prior data

exists

Ask the sales force. Instead of asking the consumer, another option is tointerpolate the sales force. The advantage of this method is that they are easy to

reach and are typically available for confrontation. The drawbacks are mainly

related to the degree of objectivity of the information retrieved with a strong

influence on the fact that the information will be biased in order to reduce the

sales objectives (reduce the amount of work that they need to do in order to sell

the products/services that need to be sold).

Ask the experts. In using this method, a company is able to ask variousdifferent types of stakeholders at the same time. The advantage of this method

is that in doing so one can talk to retailers, distributors, suppliers, consultants,

associations and other types of experts. The main drawback is the degree of

homogeneity of the information that one will retrieve from these stakeholders.


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Each, in fact, will be biased by their professional experiences and their

personal agendas.

Direct market testsHistorical data: In order to use this type of methodology, one requires the

existence of a relatively complete set of historical data upon which to

extrapolate information and potential future forecasts. The main drawback of

this method is the fact that past data does not guarantee future forecasts. The

typical analysis that is done using this method is:

V=(T,C,S,E)

V= Sales;

T= trends: typically a function related to the evolution of population, the

accumumation of wealth/capital and the evolution of technologies;

C= Sales cycles;

S= Seasonality

RegressionsQ= (X1,X2...)

The objective is to find the correlation between the demand and a set of

independent variables. The method typically used the minimizzazione dei

quadrati

Observations:

Typically the evaluation of market shares and potential markets are doneconcurrently.

In general, if the budget exists, these types of analyses are typically conducted byspecialized consulting service companies. Otherwise, these types of analyses are

conducted internally. The methods typically used are

Deterministic analyses based on sensitivity analyses Stochastic analyses based on calucations of mean and standard deviation (using

scenario analyses, each with their own NPV)


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6. OPERATIONS PLAN

The main objective of the operations plan is to evaluate how a company can manage

the transitional phase from when they decide to implement the business idea to when

the business idea is fully functional. (I.e the ramp up phase)

Typically, this is done on two levels:

The first method is related to the value chain analyses introduced before in thisdocument.

Each subprocess needs to be setup in such a way to guarantee the coherence

between the chosen strategic direction (I.e. Cost leadership, differentiation or

focalization) and the operations that need to be carried out during the development

of the business idea. For example, based on the strategic direction sought in the

strategic plan, one must chosen the type of:

Operations (production typology) Logistics (inbound and outbound) R&D management and prototyping Sales, assistance and post sales services

For each sub process, in this part of the business plan, it is opportune todistinguish between (and detail)

Policies and operative strategies Competitive advantages/differentials that can/should be taken into

consideration from the strategic plan)

Activities and processes


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Description of the inputs (be they material or immaterial) as the choice of theseinputs will for sure impact the cost structure and economic forecasts of the

financial plan

The suppliers that are deemed critical for the phases of the value chainFor example:

Operations

How does the company produce its products in terms of necessary resources,processes and potential output (theoretical quality of the products/services etc)

Resources and processes: Everything from the type of facility, dimensions,location, proximity to fundamental transport services, the characteristics of the

raw material, suppliers and their availability, price variabilities, organizational

structure etc.

Output: forecasted quantity and productivity considerations/conditions/limits,theoretical quality, quality control mechanisms

It needs to be clear that the capital invested by the company/investors is able tocover the necessary resources for the company operations

One also needs to take into account the growth of the company with time andhow this will impact the operations of the company.

In the case of business ideas that operate in the field of distribution and inservice development, it must be clear how the company intends to manage the

relationships between suppliers, how responsibilities and other specific factors

related to the business (I.e. in the case of resellers, the inventory management

system that needs to be put into place etc.)

Support services (Sales, assistance and post sales)

These are typically a set of operations that are more and more critical successfactors for todays business: especially when dealing with complex products.


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A good post sales service in fact can be a very useful tool to preserve and augmentthe reputation and the fidelity of the consumer towards the company.

Moreover, it these types of company operations can also guarantee a secondarysource of revenue for the company (which in some cases can also become primary

sources of revenue: I.e Autmotive industry and insurance, extended warranties

etc)

R&D and technology management

An important aspect is to highlight the patents, licenses and copyrights that aredeveloped within the company and how the company intends on managing it

Intellectual property rights.

Related to the above point, the company must also clarify what parts of the producs/services can be defendable and how the company intends on managing

the defence of these key parts of the product and service the offer.

Another important aspect is to evaluate the impact that protecting its IPR willhave and how it may be transformed into a competitive advantage in the long run.

It is also opportune for the business plan to highlight potential external factors that

may influence the various operations made explicit in the value chain of the

company. For example:

Technological changes: In order to make the business plan more complete, itneeds to examine the future evolutions of the available technologies, and how

these evolutions can impact the competitive positioning of the company.

Client evolution and how it may be able to impact and influence the structure ofthe industry or companys business

Normative or Governmental factors that may impact the business idea. In particular, one needs to also understand and clarify the nature, origins and the

influences they may have on business in order to understand how the company

can influence these factors to favor its business.


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All these above observations can result very important to map the timing of the

operations and the activities that need to be scheduled in order to make the business

idea become reality. (typical techniques are PERT and CPM). In fact, it is important

that within the operations plan of the business plan there exist a planning of the

various activities that must be carried out in order to bring the business idea to

operate at full regime. What follows is a simple example that illustrates the various

important macro activities that must be accomplished in order to develop a new

production plant.


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7- MANAGEMENT/ORGANIZATIONAL PLAN

Within this part of the business plan, the objective is to clarify the salient aspects of

how the business idea will be managed and organized in terms of:

(A) The critical human resources: Here the intention is to identify and clarify (1)

who are the critical human resources that can guarantee the success of the business

idea, (2) how they can give credibility to the initiative, and finally (3) what role they

will play within the business idea/initiative. Typical players can be:

Founders

Investors (active investors that will play a role within the company) Key employees Consultants

For each of these people, one needs to briefly clarify their past experiences (CV),

and, in the case that these key players currently hold positions in other companies, it

may be opportune to keep their identity private, but explain how the company intends

on appropriating the resource.

(B) The organizational structure: The organizational structure of the business

initiative needs to be coherent with the strategies and operations that were presented

and detailed in the other parts of the business plan. A typical reference model to

guide how the company can be structured was developed by Mintzberg:


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On the line of action, we can find the:

Operative nucleus/structure, which consists of all the people that are directlyresponsible for the realization of the products and services, the inbound and

outbound logistics, the transformation of the products, the sales and the post sales

operations of the company

Upper management structure that typically include the General Manager of the business initiative and the other players that can guarantee the future of the

company in terms of control, performance and profitability. In particular, their

role is to manage the company in terms of strategy development, the allocation of

resources, decision making, conflict resolution, the definition of incentive

mechanisms, as well as external relations within and external to the industry.Middle management structure is the intermediate managerial stratus that that

manages the day-to-day operations of the companies workload. In particular, the

dynamics of middle management depends mainly on the coordination methods

and mechanisms put into place (I.e. if the company decides to adopt a direct

supervision approach, the company is considered to be relatively verticalized

since the number of people that can be controlled by middle management is

limited). At this level, the main decisions are therefore to understand how to better


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structure the company (matrix, hybrid, departmental, functional structures etc.).

Typically, at this level the type of structure also entails understanding that there is

communication that comes from both upper management and the operative

structure.

At the staff level, we can identify two main categories of resources:

Technostructure or infrastructural overhead that typically analyze the production processes, plan and control the production processes and the human resource

specialists within the company (the secondary activities of Porters value chain).

Support staff, who are the people that are responsible for the various supportactivities of the company (legal staff, industrial relations, administration etc).

To design and plan the organizational structure of a company, one needs to created a

detailed design of the following aspects:

The individual company profiles in terms of:

Degree of specialization: both horizontally (in terms of the number of tasksthey must be responsible for) and vertically (in terms of the degree of

executive control of the tasks carried out)

The formalization of each profiles job descriptions in terms of responsibilities,quality control certifications and/or behaviors.

Continuous education and indoctrination whereby the firms focuses on theacquisition of new professional competencies, while the second concentrates

on the organizations rules, regulation, culture etc.

The companys macrostructure in terms of defining how many and what type ofpeople/professionals need to be called upon for each organizational/business unit

of the business idea. In particular, this means defining:

Criteria: One needs to identify a set of criteria in order to group differentresources together under the same organizational/business unit. For example,

criteria could be based on the type of responsibilities/tasks carried out


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(therefore, based on competencies on specific company processes finance,

administration, marketing etc), the type of market (therefore based on the type

of output, client or geographical area), timing (I.e. grouping people within a

unit based on work shifts etc.).

Dimensions: One needs to understand how large/small theorganizational/business units can/should be in order to facilitate coordination,

scope and objectives, and financial considerations.

To complete the organizational structure of the company, after having identified the

organizational/business units, it is then necessary to define:

Links between units via: The development of planning and controlling mechanisms that can measure the

performance and functionality of the various organizational units (Ie. Adopting

the Balanced Scorecard Methodology etc)

The development of linking mechansisms/roles such as job rotation (increasingthe number of competencies of a companys staff) or through tasks forces, casemanagers, project managers etc.

The degree of decentralization (horizontally and vertically both on the line ofaction and within the support staff)

(C) Human resource management systems in terms of

Evaluating the recruiting mechanisms that are most opportune for the variousorganizational units (based on the type of profile and number of staff one needs to

hire)

Defining the evaluation and incentive systems that will allow the companys staffto develop career paths within the company.

It may also be opportune to insert a forecast in terms of how the organizational

structure of the company will evolve throughout the timing of the business plan.


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8. FINANCIAL STRUCTURE

By financial structure, this part of the business plan intends on defining the following

financial elements that are pertinent to the development of the business idea:

The juridical structure of the entity that will house the business ideaThe financial resources neededThe sources of financingTHE JURIDICAL STRUCTURE

In terms of the juridical structure of a company, it is paramount to determine:

The minimum necessary equity neededThe definition and articulation of the responsibilities that each partner must adhere

to, and the guarantees that each supply the company

The complexity of the financial model from a tax perspectiveThe possibility of issuing an IPOPossible tax breaks etcThe relationship between the owners and the operative control of the entity that

will govern the operations of the company.

THE FINANCIAL RESOURCES NEEDED

The objective of this part of the business plan is to identify the needed cashflow that

the company needs in order to make the business idea a reality. This part of the

business plan, in fact, is a summary of the consideration that are made in the

financial/economic forecast which we will discuss in the next section of the business

plan. Having said this, the typical steps to take to develop a financial forecast are:

The development of a financial forecast in terms of the capital expenditure neededto purchase the material (machinery, facility, land etc.), immaterial (I.e. patents,

brand etc) and recurring costs of the business idea.


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The forecast of the capital needed for the WIP (work in progress/process) itemsand eventual liquidity issues which can be summarized in the calculation of the

OWC (operating working capital) = inventory + Accounts receivable Accounts

payable

In general, it is better to ask for more capital than is necessary and be able to say

that, based on the forecasted amount the company was able to reduce its capital

expenditure than the contrary.

THE SOURCE OF FINANCING

This part of the financial plan is to detail how the business initiative intends on being

financed. In particular, it has the objective to find and evaluate different methods of

financing to reduce the amount of capital that needs to be raised to cover the costs of

the initiative.

The most salient aspects that need to be considered when evaluating the varioussources of financing are to consider:

The companys degree of liquidity the companys Return On Equity

ROE = ROI + D/E* (ROI-r) where:

ROE = Return of Equity = Profit / Equity

ROI = Return of Investment = Net Operating Margin/ Invested Capital

( ROI measures how effectively a company uses its capital to generate

profits. In fact, the higher the ROI is the better it is for the company)

D = Debts

E = Equity

r = Interest rate related to the debt/financial debt

From the calculation of ROE, one can evaluate the following situations


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If (ROI-r) > 0, ROE increases IFF (if and only if) the ration between D/Eincreases;

If (ROI-r) < 0, Increasing D/E implies a decrease in ROEThis type of conclusion, however, must be treated with the right amount of

caution. In fact, if a company decides to leverage greater amount on debt, the

calculation upon which this decision is made is based on a future forecast of

ROI. Consequently, if the ROI is not attained, this meanst that the company

may run the risks on being insolvent with respect to its contractual debt, which

may lead to bankruptcy or takeovers.

The typical types of methods used by companies to raise capital are

Short and long-term debts (acting upon the liabilities of a company) Issuing of shares, preferred shares or bonds (acting upon the equity of a company)Many different types of hybrid methods such as convertible bonds, derivatives etc.


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9 FINANCIAL PLAN

Generally speaking, this part of the business plan is typically approached via a

pseudo-deterministic analysis perspective. In other words, it means that the principle

characteristics of this approach implies:

Using deterministic (or quasi-deterministic) variables to construct financialprospectus for the medium/long-term. Typically a 3/5-year period of time.

Anything longer would reduce the accuracy and feasibility of the forecasts given

the inability to forecast the future.

Using the hypotheses that have been outlined in detail in the previous sections ofthe business plan (I.e. Marketing plan, Operations plan and Organizational plan

etc). For example, if in the marketing plan one decides that it is necessary to

invest in a promotional campaign in which the presence of Hollywood stars in

needed, this cost will need to be entered into the financial forecast. Consequently,

this means that it will enter into various parts of the financial plan depending on

the type of expenditures forecast in the marketing plan (Ex. Ammortization costs

in the Balance Sheets or as promotional expenses in the Income statement etc. The

choice will be made while developing the financial plan whether or not to

decrease the net profit in the income statement or decrease the assets in the

balance sheet)

Using the quantitative and qualitative information obtained from the previoussections of the business plan to determine the:

Investments: For example, from the marketing and operating plans, one candetermine the what needs to be capitalized in terms of material and immaterial

resources etc.

Costs: obtainable from the marketing, operating and organizational plans interms of resources needed

Forecasted sales.


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With respect to the 3/5 years of the business plan forecast, it means constructingthe:

Balance sheets that take into consideration the investments, assets andliabilities of the company

Income statements that take into consideration the revenues and costsassociated with the company

Cash flow statements whereby the meaning of cash flow is that it is anindicator of the liquidity that a company was able to generate during the year in

question.

CASH FLOW = PROFIT + AMMORTIZATION = REVENUES MONETARY COSTS

NB: The cash flow statement differs from the Income statement in that it only

considers the incoming cash flow of a company (not revenue) and only the

outgoing cash flow of a company (not costs). Only cash is involved in the

forecast and statement. Sales on credit do not form a part of these documents

until you receive the actual cash. Moreover, amortization and depreciation

expenses are NOT considered in cash flow statements because they are non-

cash item

With respect to the profit & loss statement (income statement) a cash flow

statement is:

More objective since it does not include non-cash items such asamortization and depreciation. In fact, for fiscal reasons, whenever profit

calculations seem too elevated, it is possible to opt for an anticipated

amortization and depreciation plan to decrease the earnings before income

taxes (EBIT) so as to decrease the amounts payable in taxes.

Less complete because it does not take into consideration amortization anddepreciation, which means that it does not take into consideration the age of


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the technologies used for the development of the products and services

developed.

Moreover a cash flow statement allows a company to determine the

relationship between the balance sheet and the economic value of a company.

In fact, the liquidity generated during the year can be used to:

Invest in fixed assets/capital (invest in new technologies etc) Invest in working capital

OWC = INVENTORY + ACCOUNTS RECEIVABLE ACCOUNTS PAYABLE

This calculation illustrates that

Increasing the volumes sold, the average level of inventory increases,and, as a consequence also the capital necessary to maintain it.

Changing client/supplier relationships, the necessary working capitalmay also change. For example, by modifying the payment terms,

accounts receivable change, which implies that operating working

capital will change accordingly.

Even exogenous variables such as inflation rate changes may impact theOWC in monetary terms (I.e. the value of the inventory changes based

on the buying power of the currency),

Pay financial debts Distribute dividends to shareholders or equity holders

OTHER TYPES OF INFORMATIONOther business plan indicators that may prove useful to convince investors to

support the business idea may be:

Liquidity ratios Current ratio (Current Assets/Current Liabilities) Acid test ratio (Current Assets Inventory)/Current Liabilities

Other financial rations ROE, ROI, ROS (Return on Sales = Net operating Margin/sales)


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Debt/Equity ratio

INVESTMENT EVALUATIONSThe data/information contained in the balance sheet, income statement and

cash flow statement, aside from being able to evaluate the health of a company

through various financial ratio analyses (profitability and liquidity), can also be

used to evaluate the investment opportunity in question. In particular, it is

possible to evaluate the investment via two approaches

Capital budgeting calculationsNPV = CF(t)

(1+ ")t+ V(T)(1+ ")

tt=1

T# $V(0)

V(0) = The initial investment.

CF(t) = The cash flow value per period.(from cash flow statement)

= Discount rate of interest associated with the business idea. It is possible

to use the opportunity cost value for similar companies operating within the

same industry. However, in most cases, due to the novelty of the business

idea, it is difficult to calculate the opportunity cost of such initiatives.

Consequently, one must evaluate the rate of risk associated with the

initiative by:

Taking the average risk rate from financial intermediaries who typicallyevaluate business plans or closed investment funds

Conducting a sensitivity analysis Evaluate the Internal Rate of Return which is the compounded interest

rate (annual interest rate) that equates the present value of the future

cash flows with the initial outlay (investment);

V(T) = Terminal value of the initiative at time T where it can be evaluated

as:

A multiplier of the Price to equity ratio (to earnings per share) Equating V(T)) = 0


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The salvage value of the investment in which it is estimatable by takingfrom the balance sheet the material and immaterial assets of the

company and multiplying it by an appropriate coefficient (0;1)

A perpetuity:NPV =

CF(t)

(1+ ")tt=1

T=#

$

Payback time calculationsPB(t) =

CF'(")

(1+ #)tt=1

t

$

where CF(0) = -V(0) + CF(0)

CF(t) = CF(t)

CF(T) = CF(T) + V(T)

This type of calculation allows one to identify the instance in which the

future cash flows of the company are sufficient to repay the initial

investment.

Some notes related to the Payback calculations are:

This type of calculation is valid mainly when the company developingthe business plan does not ask for capital investment from shareholders.

It is unclear as to what happens after the payback period. Having saidthis, having a reduced payback period is a good guarantee (if calculated

accurately)

If is opportune NOT to use the Payback period calculation/methodologyas the ONLY valuation indicator.

SENSITIVITY ANALYSISIn this pseudo-deterministic approach to the valuation, some of the parameters

used to evaluate the initiative may vary according to certain exogenous and

endogenous phenomenon. For example, inflation may impact the valuations inat least two ways:


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The revenues and costs are calculated nominally and then actualized at anominal opportunity cost (rate) that takes into consideration inflation;

The revenues and costs are calculated relative to year zero and one uses areal discounted rate that does not take into account the inflation of prices.

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