Developing a Business
This chapter describes the purposes for business planning, business planning principles, the general concepts and tools related to business planning, and the process for developing a business plan.
PURPOSES FOR DEVELOPING BUSINESS PLANS
Business plans serve dual purposes, catering to both internal and external needs Internally, entrepreneurs create these plans to organize and align the various components of their business Externally, one of the primary objectives of a business plan is to secure funding and attract investors.
The business plan is the road map for the development of the business, it: Defines the vision for the company
Describes how the strategy will be implemented Provides a framework for analysis of key issues Provides a plan for the development of the business Is a measurement and control tool
Helps the entrepreneur to be realistic and to put theories to the test
The business plan is often the main method of describing a company to external audiences such as potential sources for financing and key personnel being recruited
It should assist outside parties to understand the current status of the company, its opportunities, and its needs for resources such as capital and personnel
It provides the most complete source of information for valuation of the business
Hindle and Mainprize (2006) suggested that business plan writers must strive to (1) effectively communicate their expectations about the nature of an uncertain future, and
To establish credibility, new ventures face significant challenges in conveying their future potential compared to established businesses Therefore, business plan writers must follow five essential communication principles to effectively articulate their vision and mitigate the liabilities of newness.
Effective business plans should be tailored to meet the specific expectations of targeted readers, providing essential information to support the proposed venture These plans must clearly define key milestones that investors and stakeholders need to understand Additionally, writers should articulate the business opportunity, the context of the proposed venture—including both internal and external environments—and the overall business model (Hindle & Mainprize, 2006).
To enhance the credibility of a business plan, writers should focus on five key principles First, they must emphasize the qualifications and expertise of the venture team to establish trust Additionally, it’s crucial to provide detailed explanations of the outlined plans, ensuring that readers have the necessary information to evaluate the plan's validity The scenario integration principle highlights the importance of realistic assumptions and foresight regarding the venture's future Writers should also present comprehensive financial connections among all components of the plan Lastly, a credible business plan should clearly define the value proposition, detailing what stakeholders can expect from their involvement in the venture (Hindle & Mainprize, 2006).
GENERAL GUIDELINES FOR DEVELOPING BUSINESS PLANS
Many businesses must have a business plan to achieve their goals The following are some basic guidelines for business plan development.
A standard format is applied to help the reader understand that the entrepreneur has thought everything through, and that the returns justify the risk
Bind the document so readers can easily go through it without it falling apart
AS YOU WRITE YOUR BUSINESS PLAN
1 If appropriate, include nice, catchy, professional graphics on your title page to make it appealing to targeted readers; but don’t go overboard.
To enhance reader experience, ensure your document is securely bound using methods such as a three-ring binder or coil binding Choose a binding technique that keeps the content easily accessible and does not obstruct any information adjacent to the binding.
3 Make certain all of your pages are ordered and numbered correctly.
4 The usual business plan convention is to number all major and subsections within your plan using a format as follows
1.1 First subheading under the first main heading
1.1.1 First sub-subheading under the first subheading
2.1 First subheading under the second main heading
Utilize the styles and references tools in Word to automatically format and number your section titles, as well as to create a table of contents Before printing your document, ensure you update the automatic numbering and the generated tables for accuracy.
If you fail to do this your numbering may be incorrect.
5 Prior to submitting your plan, be 100% certain each of the following requirements are met.
Everything must be completely integrated The written part must say exactly the same thing as the financial part.
All financial statements must be completely linked and valid Make sure all of your balance sheets balance.
Everything must be correct There should be NO spelling, grammar, sentence structure, referencing, or calculation errors.
To enhance readability and comprehension, it is essential to organize and format your document effectively Choose a layout that allows for easy navigation, ensuring that diagrams, charts, and statements are clearly visible and placed in the most appropriate sections of the plan.
Incorporating both text and visual elements like tables or figures can enhance your business plan by presenting information more effectively However, it's crucial to avoid redundancy, as repeating the same information can be counterproductive and diminish the overall impact of your document.
Include all the necessary information to enable readers to understand everything in your document.
Be clear what terms you use in your plan For example, the following statement in a business plan would leave a reader completely confused.
“There is a shortage of 100,000 units with competitors currently producing
25,000 We can help fill this huge gap in demand with our capacity to produce 5,000 units.”
The statement suggests a potential shortage of 100,000 units, which could be mitigated by competitors producing 25,000 units annually, resulting in a four-year shortage Alternatively, it may indicate a continuous annual deficit of 100,000 units, with only 25,000 produced each year, leading to an escalating total shortage over time.
You must always provide the complete perspective by indicating the appropriate time frame, currency, size, or other measurement.
Be certain that if you use a percentage figure, you indicate to what it refers – otherwise the number is meaningless to a reader.
When your plan involves international aspects, clearly specify the currency or currencies used for costs, revenues, prices, and other values You can do this by stating the currency at the beginning of the document or by indicating it each time a value is presented Additionally, consider providing values in multiple currencies when necessary It is also essential to evaluate and describe the exchange rate risk you may face in your document.
6 Ensure credibility is both established and maintained (Hindle & Mainprize, 2006).
If a statement is included that presents something as a fact when this fact is not generally known, always indicate the source Unsupported statements damage credibility.
To ensure your business plan is credible, it is essential to be specific and avoid vague references Include hard numbers, actual prices, and real data obtained through thorough research This approach demonstrates the viability of your business strategy and enhances its overall value.
To achieve effective marketing, it is essential that your strategies are integrated and cohesive This means that your pricing strategy should align seamlessly with your product or service strategy, distribution channels, and promotional efforts For instance, promoting your product as a premium offering while setting prices below market value would create a disconnect and confuse potential customers.
7 Before finalizing your business plan, re-read each section to evaluate whether it will appeal to your targeted readers.
USEFUL RESOURCES FOR BUSINESS PLANNING
Canada Business Network http://www.canadabusiness.ca/eng/
Innovation, Science and Economic Development Canada: Financial Performance Data http://www.ic.gc.ca/eic/site/pp-pp.nsf/eng/Home
BizPal site for accessing licensing and other needs http://www.bizpal.ca/
Canada Revenue Agency site for CRA asset classifications http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/dprcbl-eng.html
Canadian Company Capabilities database to use to find suppliers and buyers http://www.ic.gc.ca/eic/site/ccc-rec.nsf/eng/home
For finding possible Canadian Government contracts: http://www.merx.com/
Canada http://www.conferenceboard.ca/
Bank of Canada http://www.bankofcanada.ca/
Bank Sites http://www.td.com/ http://www.rbc.com/ http://www.scotiabank.com/ http://www.bmo.com/ http://www.cibc.com/
Business Loan Calculator http://www.rbcroyalbank.com/cgi- bin/business/loan_calc/loans.cgi Use the business area within our library site http://library.usask.ca/
Come to my office to browse through past plans http://www.edwards.usask.ca/faculty/marv%20painter/businessplans/
When considering business plan resources, you can explore business plan software and templates, which are readily accessible online and at various banks However, it's important to exercise caution, as these tools are often tailored for individuals lacking business experience and may not provide the depth required for your specific needs.
A ratchet is a widely recognized tool that enhances efficiency by allowing users to make progress with each action while preventing the loss of previous advancements.
Use the ratchet effect to help you develop an excellent business plan.
The ratchet effect in a business plan signifies that every element you incorporate—be it words, sentences, paragraphs, headings, charts, figures, or tables—advances your plan incrementally This approach accomplishes two key objectives: enhancing clarity and reinforcing the overall effectiveness of your business strategy.
First, only needed and relevant information is included
Second, your additions build credibility in a relevant way.
Essential Initial Research
This chapter introduces the distinct levels of analyses that must be considered while stressing the importance of applying the appropriate tools to conduct the analyses at each level.
Conducting essential initial research is crucial for any business plan, as all information must be supported by facts from credible primary or secondary sources Entrepreneurs may also base valid claims on their personal experience and expertise, making it important to clearly outline their background and experiences to substantiate the assertions made in the business plan.
Evidence-based claims makes the business plan stronger.
When evaluating entrepreneurial opportunities, a structured process known as idea screening is essential Entrepreneurs should conduct thorough analyses at societal, industry, market, and firm levels to assess various venture ideas effectively It is crucial to perform Essential Initial Research at all four levels to determine the viability of market opportunities This initial high-level scan aids in making informed decisions, while secondary scans should be conducted regularly to support different aspects of the business plan, including operations, marketing, and finance Only research-based, relevant information that adds value should be included, such as insights indicating potential changes in interest rates, which can influence financing strategies like preferring equity over debt.
Securing construction quotes can often take time, so it's essential to proceed with your project while gathering necessary data Valuable resources for this information include Statistics Canada, the Bank of Canada, and the IBIS World Report.
Finding support data is not always immediate, plant a flag and return to the subject at a later time.
Understanding the PESTEL factors—political, economic, social, technological, environmental, and legal—is crucial for evaluating the potential impact on a business idea Trends within these factors can determine which venture concepts should be pursued or discarded It’s essential to communicate these insights clearly, using straightforward language to ensure that readers grasp the competitive landscape without getting lost in complex terminology.
Utilize Porter’s Five Forces Model to evaluate the industry dynamics relevant to your business sector This analysis should concentrate on the specific economic segment you plan to enter, ensuring that the chosen assessment tool effectively captures the critical factors influencing your market It's essential to communicate findings clearly, avoiding complex terminology for better understanding.
(i.e threat of new entrants) and use simpler wording (i.e difficulty of entering the market) or flip to an analysis of the threat (i.e strategies to establish and maintain market share).
To successfully compete in your industry, it is essential to utilize a tool that generates valuable market-level insights This tool typically consists of a series of questions aimed at uncovering critical information necessary for crafting effective strategies By leveraging this information, you can enhance the likelihood of success for your proposed business venture.
To effectively assess a firm's performance, it is essential to analyze both internal organizational trends and external market profiles Utilizing a variety of tools for internal organizational analysis is recommended to gain a comprehensive understanding of the company's strengths and weaknesses.
ANALYZING THE TRENDS AT EACH LEVEL
Figure 3 – Different Levels of Analysis
Use an appropriate tool like the PESTEL model to assess both the current situation and the likely changes as they may affect you.
Political factors (federal & provincial & municipal government policy, nature of political decisions, potential political changes, infrastructure plans, etc.)
Economic factors (interest rates, inflation rates, exchange rates, tax rates, GDP growth, health of the economy, etc.)
Social factors (population characteristics like age distribution and education levels, changes in demand for types of products and services, etc.)
Technological factors (new processes, new products, infrastructure, etc.)
Environmental factors (effects of climate / weather, water availability, smog and pollution issues, etc.)
Legal factors (labour laws, minimum wage rates, liability issues, etc.) Assess the impact these trends have upon the venture:
Do the trends uncover opportunities and threats? Can opportunities be capitalized on?
Can problems be mitigated? Can the venture be sustained?
Use an appropriate tool like the Five Forces Model (Porter, 1985) to analyze the industry in which you expect to operate.
Horizontal relationships: Threat of substitutes, Rivalry among existing competitors, Threat of new entrants
Vertical Relationships: Bargaining power of buyers, Bargaining power of suppliers ANALYZE MARKET LEVEL TRENDS
Use an appropriate method like a market profile analysis to assess the position within the industry in which you expect to operate.
Determine the answers to questions like the following: How attractive is the market?
When entering a new market, it's essential to anticipate how competitors might react, as their responses can significantly impact your business strategy Currently, the market size is substantial, with projections indicating significant growth in the coming years Understanding both the existing market size and the anticipated expansion is crucial for strategic planning Additionally, analyzing current and projected growth rates will provide valuable insights into market trends and opportunities for your business.
At what stage of the development cycle is the market? What level of profits can be expected in the market?
To determine market potential, it's essential to analyze the proportion of the market that can be captured, along with the associated costs for both capturing this share and ensuring long-term business sustainability Understanding these factors will help in strategizing effectively for growth and maintaining a competitive edge.
Before launching a new business, it's essential to identify potential customers who either currently buy similar products or services from competitors or have yet to make any purchases Consequently, the customer base for a new venture will originate from one of these two sources.
Entrepreneurs need to strategically attract customers away from direct competitors or persuade them to reconsider their spending habits to choose their new product or service over alternatives offered by indirect competitors This requires a clear understanding of the competitive landscape and a well-defined approach to customer acquisition.
Strategy, as defined by Porter (1996), involves either differentiating from competitors or executing similar actions in unique ways To create a successful strategy, entrepreneurs must have a deep understanding of their competition.
To navigate the competitive landscape, entrepreneurs should identify both current and potential competitors, analyze the quality, pricing, and competitive advantages of their offerings compared to existing players, and determine if they can provide unique products or services—or present existing ones in innovative ways—to capture a sufficient customer base Additionally, they must anticipate competitor responses to their market entry.
ANALYZE FIRM-LEVEL TRENDS (ORGANIZATIONAL ANALYSIS)
There are several tools available for firm-level analysis, and usually several of them should be applied because they serve different purposes.
To effectively formulate and evaluate potential strategies, utilize tools such as SWOT analysis or the TOWS Matrix, focusing on leveraging organizational strengths, addressing weaknesses, capitalizing on opportunities, and mitigating threats Additionally, conduct a thorough financial analysis while considering the founder's fit and the essential competencies required for the venture's success.
SWOT analysis – identify organizational strengths and weaknesses and external opportunities and threats
The TOWS matrix is a strategic tool that enables organizations to develop effective strategies by leveraging their strengths to capitalize on opportunities and to counteract threats It also focuses on mitigating weaknesses by seizing opportunities and minimizing the potential impact of threats By utilizing the TOWS matrix, businesses can create a comprehensive approach to enhance their competitive advantage and navigate challenges effectively.
For analyzing a firm’s strategy, apply a VRIO Framework analysis.
Business
This chapter introduces the concept of a business model, focusing on the Business Model Canvas as a tool to conceptualize and categorize its key elements.
Magretta (2002) described business models as “stories that explain how enterprises work”
According to Osterwalder, Pigneur, and Clark (2010), a business model outlines how an organization creates, delivers, and captures value Chatterjee (2013) elaborates that a business involves selling products for profit, while a business model consists of the configuration of activities and resources that drive profitability for that specific business.
According to Osterwalder et al (2010), a start-up differs significantly from an established business, requiring distinct skills for initiation rather than operation If a start-up remains in its initial phase for an extended period, it is likely failing to evolve into a sustainable enterprise Entrepreneurs who create effective business models that provide value to both their target customers and the venture itself are more likely to successfully transition their start-up into an ongoing business.
The business model canvas is made up of nine parts that, together, end up describing the business model (see Figure 6).
The following elements of the Business Model Canvas were taken, with permission, from http://www.businessmodelgeneration.com.
Who are our key partners?
Who are our key suppliers?
Which key resources are we acquiring from partners? Which key activities do partners perform?
Motivations for partnerships: optimization and economy; reduction of risk and uncertainty; acquisition of particular resources and activities.
What key activities do our value propositions require? Our distribution channels?
Categories: production; problem solving; platform/network.
What key resources do our value propositions require? Our distribution channels?
Types of resources: physical; intellectual (brand patents, copyrights, data); human; financial Value propositions
What value do we deliver to the customer?
Which one of our customer’s problems are we helping to solve?
What bundles of products and services are we offering to each customer segment? Which customer needs are we satisfying?
Characteristics: newness; performance; customization; “getting the job done”; design; brand/status; price; cost reduction; risk reduction; accessibility; convenience/usability.
What type of relationship does each of our customer segments expect us to establish and maintain with them?
Which ones have we established?
How are they integrated with the rest of our business model? How costly are they?
Examples: personal assistance; dedicated personal assistance; self-service; automated services; communities; co-creation.
For whom are we creating value?
Who are our most important customers?
Mass market; niche market; segmented; diversified; multi-sided platform.
Through which channels do our customer segments want to be reached? How are we reaching them now?
How are our channels integrated?
Which ones are most cost-efficient?
How are we integrating them with customer routines?
To effectively engage customers, companies must navigate five key channel phases: First, raising awareness about their products and services is crucial Next, assisting customers in evaluating the organization's value proposition enhances decision-making The purchase phase involves facilitating a seamless transaction for specific products and services Following this, delivering the promised value proposition ensures customer satisfaction Finally, providing robust post-purchase support is essential for maintaining customer loyalty and trust.
For what value are our customers really willing to pay? For what do they currently pay?
How are they currently paying? How would they prefer to pay?
How much does each revenue stream contribute to overall revenues?
Types: asset sale; usage fee; subscription fees; lending/renting/leasing; licensing; brokerage fees; advertising.
Fixed pricing: list price; product feature dependent; customer segment dependent; volume dependent.
Dynamic pricing: negotiation (bargaining); yield management; real-time-market. Cost structure
What are the most important costs inherent in our business model? Which key resources are most expensive?
Which key activities are most expensive?
Is your business more: cost driven (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing); value driven (focused on value creation, premium value proposition).
Sample characteristics: fixed costs (salaries, rents, utilities); variable costs; economies of scale; economies of scope.
To develop a successful business model, it is essential to continually refine the nine components by adding detailed descriptions and plans, while actively engaging in start-up activities This iterative process involves replacing initial assumptions with updated information, allowing the business model to evolve effectively A key aspect of this approach is that the business owner should personally interact with potential customers to gain a deep understanding of their needs, rather than relying solely on hired sales personnel Such direct engagement is crucial for the evolution of the business model, ensuring it aligns with customer expectations and operational realities (Osterwalder et al., 2010).
A business plan should only be developed after establishing a clear business model, as emphasized by Osterwalder et al (2010) This suggests that the Business Model Canvas is particularly effective for technology-driven companies and others that can initiate operations and evolve into sustainable ventures By launching operations and making iterative adjustments, entrepreneurs conduct valuable market research, which can later be organized into a comprehensive business plan when necessary.
Osterwalder et al (2010) argue that traditional business school curricula primarily focus on preparing students for established companies, covering topics like organizational structures and sales management However, this approach often overlooks the unique challenges of start-ups, which require a different understanding of business dynamics The Business Model Canvas is introduced as a tool to bridge this gap, providing insights into the functioning of new ventures and their inherent volatility.
The Business Model Canvas is a valuable tool for launching small-scale business operations, allowing for continuous adjustments to develop a successful business model in real life Unlike traditional approaches that rely on extensive pre-planning and risk launching untested business ventures, the Canvas promotes flexibility and adaptability Traditional start-ups often struggle as they attempt to modify their plans after set-up, leading to miscommunication between sales teams and product developers, who may blame each other for challenges Ultimately, the core issue often lies in the company’s inability to meet customer needs, compounded by a lack of effective mechanisms to identify and address these shortcomings.
This chapter described business models and used the example of the Business Model Canvas as a tool that entrepreneurs can use to develop and define their own business models.
LEARNING OBJECTIVES After completing this chapter, you will be able to:
Develop a comprehensive business plan draft.
Initial Business Plan Draft
This chapter presents a method for drafting your business plan and highlights the key components of a comprehensive business plan, serving as a template to guide you in starting your own business plan.
Provide statements that are backed by evidence or data
Include context and references with every table, figure, or illustration
Include tables and financial information that is relevant, clear, concise, and exclude unnecessary material
Present timelines for distinct purposes
Exclude generic sections but have clear and customized to the particular business or its environment
Evidence-based claims strengthen your business plan.
Providing context for tables and figures is critical.
WRITING THE DRAFT BUSINESS PLAN
Although there are various ways to approach the task of writing a draft business plan, one effective approach is to do the following:
To create a comprehensive business plan, utilize the outlined sections of this chapter as a guide Ensure to format the headings in Word, enabling the automatic generation of a table of contents for easy navigation.
This will provide you with a template into which to insert the information needed for your plan.
Insert the relevant parts of the written work produced during Essential Initial Research into your new business plan template You can do this in one of two ways.
To enhance your business plan, start by integrating the findings from your initial research into the relevant sections of your template This approach allows you to support and justify your strategies and decisions effectively As you refine your plan, feel free to rearrange these insights from your environmental scan to strengthen your overall presentation Ultimately, this strategy leads to a more robust business plan.
Incorporate the findings from your societal and industry-level analyses into the Operating Environment section, as outlined below Typically, the market-level analysis is most suitable for inclusion in the Marketing Plan, while the firm-level analysis can be integrated throughout various sections of the business plan.
Completing this step will give you the satisfaction of seeing some of your work so far taking shape in the form of a business plan.
Incorporating the findings from your environmental scan into the appropriate sections of your plan will serve as a crucial foundation, enabling you to create well-informed, realistic, and evidence-based strategies and decisions.
When creating your new business plan template, seamlessly integrate your business model throughout various sections, as there is no dedicated area for its explicit description Ensure that the key elements of your business model are effectively woven into relevant parts of the plan to provide a comprehensive overview.
Fill in as much relevant information as you can under as many of the headings on your business plan template as possible.
When creating content, it's essential to incorporate both sourced information and assumptions based on your insights, which you may later refine with credible data This approach ensures a balanced perspective, allowing for a blend of verified facts and personal interpretations that can evolve as more accurate information becomes available.
When incorporating information into your business plan template, it is essential to clearly cite your sources For instance, if you list necessary office equipment and furniture along with their exact costs from supplier catalogs, be sure to specify which catalogs you referenced Additionally, if you consulted an industry expert who provided recommendations on manufacturing processes, include their name and credentials, provided you have permission to do so This practice not only enhances the credibility of your business plan but also ensures transparency in your research.
Establishing your credibility as a business plan writer enhances the overall trustworthiness of your business plan Additionally, this proactive approach can save you time in the future by allowing you to identify and incorporate similar items and their associated costs into your plan early on.
To enhance the professionalism of your plan, it is essential to utilize a single, established referencing method, such as APA Avoid the temptation to create your own citation style or to mix multiple methods, as this can lead to confusion and diminish the credibility of your work Adhering to a consistent referencing format will not only streamline your citations but also reflect a higher standard of academic integrity.
To enhance your planning process, it's advisable to highlight any information that isn't sourced by using a distinct font color This practice allows you to identify assumptions easily, with the goal of eventually replacing them with verifiable, source-backed data Once you've sourced the information, revert the font color to its standard hue, enabling you to quickly recognize which parts still require sourcing.
If you are a construction expert providing estimates for building costs in your business plan, it's essential to establish your credentials and indicate which information is derived from your expertise By clearly flagging your assumptions, you can easily identify the areas that require sourced information before finalizing your business plan, ensuring its credibility and reliability.
Utilize the designated schedule in the spreadsheet templates to document your estimated monthly sales revenue Ensure that these projections are grounded in logical criteria, and implement formulas within your spreadsheets This approach allows for easy adjustments; should you need to modify a criterion, you can simply update a single cell or a few cells instead of altering the entire spreadsheet.
Accurately projecting sales can be challenging, but establishing a systematic approach early on provides business plan writers with a strong foundation for their plans By utilizing a well-developed sales model that leverages the capabilities of electronic spreadsheets, writers can efficiently adjust their assumptions and overall estimates as needed, streamlining the planning process.
Fill in the spreadsheet templates with all relevant figures from your various schedules Clearly differentiate assumption-based numbers by using a distinct font, similar to your written plan When presenting actual numbers, ensure that the source of each figure is clearly indicated for the reader's understanding.