Chapter 6: Writing a Business Plan
6-5.
It is often argued that the process of writing a business plan is as important as
the plan itself, particularly for the top management team of a young firm. Why
is this so?
Answer: MyLab Question.
6-6.
Who reads the business plan and what are they looking for when doing so?
Answer: (1) A firm’s employees and (2) investors and other external
stakeholders. A firm’s employees read its business plan to more fully
understand the vision and mission of the firm, its operational details, and to
make sure the role they play in the firm is in sync with the entirety of the plan.
Investors and other stakeholders read the plan to assess the feasibility of the
business’s idea and to make a judgment on how exciting an opportunity the
business represents.
6-7.
How will investors typically react if they think a business plan is based on
estimates and predictions rather than on careful analysis and facts?
Answer: To appeal to investors, a business plan must be realistic and not
reflective on overconfidence on the firm’s part. Overly optimistic statements or
projections undermine a business plan’s credibility, so it is foolish to include
them. Entrepreneurs can obtain facts to substantiate their plans by conducting
both primary and secondary research.
6-8.
Why is it important for a business plan to follow a conventional structure rather
than be highly innovative and creative?
Answer: Typically, the people who read a business plan are very busy, and want
a plan where they can easily find critical information.
6-9.
What are the differences between a summary business plan, a full business plan,
and an operational business plan?
Answer: A summary business plan is 10 to 15 pages and works best for
companies that are very early in their development and are not prepared to write
a full plan. A full business plan is typically 25 to 35 pages long, and it works
best for new ventures that are at the point where they need funding or financing,
and serves as a “blueprint” for a company’s operations. An operational business
plan is 40 to 100 pages long, and is meant primarily for an internal audience. It
works best as a tool for creating a blueprint for a new venture’s operations and
providing guidance to operational managers.
Chapter 6: Writing a Business Plan
6-10.
Why should the executive summary, which is one of the first things that appears
in a business plan, be written last?
Answer: The plan itself will evolve as it’s written, so not everything is known at
the outset. In addition, if you write the executive summary first, you run the risk
of trying to write a plan that fits the executive summary rather than thinking
through each piece of the plan independently.
6-11.
What is the difference between the industry analysis section and the market
analysis section of a business plan?
Answer: The industry analysis describes the industry the business will be in,
such as the toy industry, the fitness center industry, or the electronic games
industry. The market analysis describes the specific target market within the
broader industry the firm plans to target, such as the educational toy market for
two- to seven-year-old children in the broader toy industry.
6-12
What is the difference between a concentrated and a fragmented industry?
Answer: Concentrated industries are dominated by a few large firms, whereas
fragmented industries include a large number of smaller companies.
Fragmented industries are more receptive to new firms.
6-13.
What is the purpose of “The Economics of the Business” section of a business
plan?
Answer: The economics of the business section of a business plan addresses the
basic logic of how profits are earned in the business as well as the sales level
required to break even.
6-14.
If you are developing a completely new product or service, what type of
information should you include in your business plan regarding the status of the
development efforts?
Answer: MyLab Question.
6-15.
What is the purpose of the “Operations Plan” section of a business plan?
Answer: The operations plan section of a business plan outlines how the
business will be run and how the product or service will be produced.
6-16.
Why is the “Management Team and Company Structure” section of a business
plan often touted as one of the most important sections?
Answer: Because investors and others place a high value on the composition of
a new venture’s management team (in terms of experience, educational
Chapter 6: Writing a Business Plan
background, past accomplishments, etc.) and often look at other sections of the
plan only if the Management Team and Company Structure section is
sufficiently convincing.
6-17.
What is the purpose of a sources and uses of funds statement?
Answer: The financial portion of a business plan should begin with an
explanation of the funding that will be needed by the business during the next
three to five years along with an explanation of how the funds will be used. This
information is called a sources and uses of funds statement.
6-18.
What is the purpose of an assumptions sheet?
Answer: An assumption sheet explains the basis for the numbers included in the
pro forma financial statements. It is important to inform the readers of a
business plan of the major “assumptions” under which the financial numbers
were generated.
6-19.
What are the differences between historical financial statements and pro forma
financial statements?
Answer: Historical financial statements look backward and pro forma financial
statements look forward.
6-20.
What is the number one rule in making an investor presentation?
Answer: Follow directions. For example, the presenter has to pay regard to the
time limit for the presentation. If the presentation is scheduled for 20-minutes
plus 40-minutes for a question and answer session, then the presenter must not
exceed his/her allotted time.
APPLICATION QUESTIONS
6-21.
Travis Ryan is one of four cofounders of a skateboard company. The
cofounders have decided to write a business plan to obtain funding for their
venture. During a recent meeting, Travis said, “I know that we’re all really
busy, so I’d like to volunteer to write our business plan. A friend of mine has a
house on a lake near where we are going to school. If the three of you agree, I’ll
take my laptop to my friend’s house for a couple of days and knock out our
business plan. Any objections?” If you were one of Travis’s cofounders, what
would you say? What alternative approaches to writing a business plan would
you propose and why?
Answer: Travis may be well-intended, but his approach is incorrect. One of the
biggest benefits of writing a business plan is that it allows the founders of a firm
Chapter 6: Writing a Business Plan
to work together to hash out and put in writing all aspects of the proposed
business venture. By writing the plan himself, Travis will miss the insights that
his co-founders could have provided. Also, by writing a business plan together,
the co-founders of a business get a sense of how well they’ll work together once
the business is launched. If they experience significant disagreements or
conflict during the process of writing a business plan, they should rethink
whether they want to commit to working together to start a business.
The only sensible approach is for the four co-founders to write the business plan
together.
6-22.
A good friend of yours, Andrew Waters, has decided to leave his corporate job
in order to launch a private SEO (search engine optimization) consulting firm.
He is putting together a business plan for this venture and says the following to
you, “I’ve read several books and articles about how to write a business plan,
and there is a point about which I am still a bit confused. Is a business plan
written more for learning and discovering or is it written more for pitching and
selling?” What would you say to Andrew in response to his question?
Answer: Both answers are right. A business plan is a dual-purpose document
used both inside and outside the firm. Inside the firm, the plan helps the
company develop a road-map to follow to execute its strategies and plans (this
is where learning and discovering takes place). Outside the firm, it introduces
potential investors and other stakeholders to the business opportunity the firm is
pursuing and how it plans to pursue it (this is where the plan is developed for
pitching and selling).
6-23.
Kevin Andrews and Karen Platt are college seniors. They’re in the process of
launching an unsweetened, fruit-flavored bottled water start-up named Compete
H2O. The start-up will be unique in that Compete H2O will be sold via small
kiosks located in fitness centers. The university that Kevin and Karen attend
hosts an annual business plan competition. Kevin is in favor of entering the
competition. Karen is opposed to the idea, arguing that Compete H2O’s
business plan is complete and it is time to move forward. What advantages
might Kevin and Karen gain by participating in the university’s business plan
competition?
Answer: Kevin and Karen should definitely compete. There are two advantages.
First, they will invariably get feedback from the judges that will be helpful to
them. Entrepreneurs should never view their business plans as “complete.”
Even though the document may be complete, a vibrant business will always be
6-24.
Imagine you just received an e-mail message from a friend. The message reads,
“Want to let you know that I just finished writing the business plan for my new
venture. I’m very proud of what I’ve written. The plan is comprehensive and
just a bit over 100 pages in length. The executive summary itself is 9 pages
long. I intend to send my plan to investors beginning next week. Do you have
any words of advice for me before I do this? Be honest. I really want to get
funding!” How would you respond to your friend’s request for feedback?
Answer: Your friend’s approach is a mistake. No one will read a 9-page
executive summary, let alone a 100-page business plan. Most business plans are
25 to 35 pages long, and regardless of how complicated the new venture is, or
how much work an individual is willing to put into a plan, it is best to stick to
the conventional page limits. Remember, additional information can be placed
in an appendix, but the plan itself should be rather short. As hard as it is to
believe, most investors and others who read business plans see a long plan as a
weakness rather than a strength.
6-25.
The entrepreneurship class you are taking meets for four hours once per week.
A break of 10 minutes or so takes place after the first two hours of each class.
During a recent break, you overheard one of your classmates say to another
person that in her opinion, the teacher is overselling the importance to potential
investors of a start-up’s management team. “After all,” the classmate says, “a
good product outweighs any deficiency a firm may have in terms of managers
and their abilities.” Given what you have learned about business plans, what
would you say to your classmate to convince her that she needs to rethink her
view regarding potential investors’ views about the quality of a proposed
venture’s management team?
Answer: Your classmate is incorrect. Investors read more business plans with
interesting ideas than they are able to finance. As a result, it’s often not the idea
or market that wins funding among competing plans, but the perception that one
management team is better prepared to execute its idea than the others.
Piggybacking on this point, an often repeated phrase among investors is that
they’d rather fund an A management team and a B idea than an A idea and a B
management team. The rationale for this notion is that the idea will invariably
change. It’s the prowess of the management team to determine the changes that
need to be made and to execute upon the best possible idea.
6-26.
d.light, which operates as a for-profit social enterprise, is the focus of Case 6.2.
What, if any, special factors should be kept in mind when writing a business
plan for a for-profit social enterprise?
Chapter 6: Writing a Business Plan
achieve its social mission, while earning a profit and attracting the attention of
potential investors.
6-27.
Michael Graves and Jill Simpson just left their jobs with Microsoft to launch a
business that will sell a new type of fax machine. They wrote a full business
plan that they’ve asked you to review. When reading the plan, you noticed that
several key sections begin with the phrase “We believe….” Is any
knowledgeable person who reads this business plan going to know what “We
believe…” really means? What is the problem with including the phrase “We
believe…” to introduce key sections of a business plan?
Answer: The problem with the statement “We believe” is that it suggests what
is about to be said is based on what the writer believes to be true, not what has
been proven to be true by data or careful analysis. Business plans ring hollow if
they’re based on the writer’s personal beliefs or mere speculation or guesswork.
The most compelling business plans are based on conclusions produced by solid
primary and secondary research.
6-28.
Recently, Megan, Jennifer, and Mark, the cofounders of a medical products
company, presented their business plan to a group of investors in the hopes of
receiving funding for their venture. One of the investors asked the three, “How
much of your personal money do each of you have invested in this firm?” Is this
a legitimate question for the proposed investor to ask? Why would an investor
want to know how much of their own money each cofounder has committed to
the proposed new venture?
Answer: It is a legitimate question to ask. The investor wants to know how
much “skin in the game” that Megan, Jennifer, and Mark have. There are two
reasons that investors want entrepreneurs to have “skin in the game.” The first
is that if the co-founders of a business don’t have sufficient confidence in the
future of their firm to invest (and risk) their own money, why should the
investor take the risk? Second, if the co-founders of a business have little or no
money of their own invested in a venture, it is much easier for them to walk
away than if they had their own money invested and at risk.
6-29.
Patty Carroll is thinking about opening a high-end fashion boutique in an
affluent suburb of Minneapolis. She contacts an angel investor she knows has
previously invested in this type of firm and asked if he would read her business
plan. She received the following response from the angel investor: “I would be
glad to read your plan. But you should know that when examining business
plans for high-end fashion boutiques, the section that I concentrate on with
great intensity is called ‘The Economics of the Business.’” Why do you think
the angel investor concentrates on this particular section of a business plan
when studying proposals to launch a high-end fashion boutique? What
specifically do you think the angel investor is interested in understanding when
concentrating on this section?
Chapter 6: Writing a Business Plan
Answer: Fashion boutiques are typically low-volume high-margin businesses
with relatively high fixed costs. What the angel investor is probably looking for
is convincing evidence that the business is financially viable (i.e., the margins
and projected sales are high enough to cover variable and fixed costs and
provide an adequate return to investors). The investor is also probably interested
in the break-even analysis, and whether the break-even numbers seem realistic.
YOU BE THE VC 6.1
Company: Beyond Meat (www.beyondmeat.com)
Business Idea: Provide consumers with plant-based protein foods that take the animal
out of meat – without sacrificing the taste, chew, or satisfaction.
You Be the VC Scorecard
Beyond Meat
(www.beyondmeat.com)
Item
Strength of New-Venture
Team
Strength of the Opportunity
Strength of the Industry
Chapter 6: Writing a Business Plan
Strength of Business Model
Average Score
Decision: We would fund this firm. We like the founder of the firm (and the management
team he has put together), the opportunity Beyond Meat is pursuing, and the strength of
the industry. We also like the fact that Beyond Meat is solving a problem that will bring
relief to people who are averse to meat in its traditional form.
YOU BE THE VC 6.2
Company: Ava (www.ava.me)
Business Idea: Build a smartphone app that transcribes conversations received through
mobile phones’ microphones into text, so people with hearing problems can follow along
in a group setting.
You Be the VC Scorecard
Ava
(www.ava.me)
Item
Score/Comments
Strength of New-Venture
Team
Strength of the Opportunity
Chapter 6: Writing a Business Plan
Strength of the Industry
Strength of Business Model
Average Score
Decision: We wrestled with this one for a while before making a decision. Ultimately, we
decided that we would not fund the firm. We like the management team and the product.
We’re just not sure how widely it will be adopted. Given that it requires a smartphone for
the user and others involved in the conversation also to have smartphones, the market
appears to be limited.
CASES
Case 6.1
Birchbox: Leveraging the College Experience to Write a Business Plan and Launch a
Growing Start-Up
DISCUSSION QUESTIONS
6-34.
How effectively do you think Katie Beauchamp and Hayley Barna used their
time in college to advance their business idea?
Chapter 6: Writing a Business Plan
Answer: Most students will say that Beauchamp and Barna used their time in
college to advance their business idea very effectively. The specifics of how they
used their time is chronicled under “The College Experience” and “Last
Semester at Harvard—A Testing Ground for Birchbox” portions of the case.
6-35.
In what ways is Birchbox’s business approach a win-win for both its suppliers
and its customers?
Answer: Birchbox’s approach is a win for its suppliers because it allows its
suppliers to get its products in front of a receptive audience. By doing so, its
suppliers hope to acquire new customers that will buy full-sized versions of the
products via Birchbox’s Web site or any other place the product is sold.
Birchbox is a win for customers because it allows customers to “discover” new
beauty products. It also provides a convenient way for its subscribers to buy full-
sized versions of the products they like via the Birchbox Web site.
6-36.
How was writing a business plan and preparing for a business plan competition
helpful to Katie Beauchamp and Hayley Barna while Birchbox was still in the
planning, testing, and prototyping stage?
Answer: Beauchamp and Barna took several steps leading up to the competition
that were helpful. They essentially completed a product/service feasibility
analysis by building a prototype of the box, persuading several suppliers to sign
on to test whether the service was feasible, and then signing on an initial handful
of subscribers to test the service to see if it was valuable. They solicited feedback
from all the groups along the way. The competition itself provided tremendous
exposure for Birchbox and from Beauchamp and Barna as nascent entrepreneurs.
They met people who became advisors and mentors. They also made contact
with venture capitalists, some of which offered them funding.
6-37.
Going forward, what are the most serious challenges facing Birchbox? Which of
these challenges do you believe is the most threatening to the firm’s success? Do
you think Birchbox will have to pivot its business plan again? If so, what factors
do you think will precipitate the next pivot?
Answer: The most serious challenges are (1) Birchbox at some point may plateau
in terms of subscribers for its stable women’s subscription service; (2) new
markets may be more difficult to grow than their initial one (for example, the
number of products and product samples made for men’s grooming and lifestyle
supplies is much lower than those made for women); and (3) growing
competition. Although Birchbox remains the clear leader in its space, a number
of copycat companies have launched that are competing with Birchbox for
Chapter 6: Writing a Business Plan
challenge that they think is the most problematic. This should lead to a
discussion of whether Birchbox will have to pivot its business plan. Clearly, the
nature of the challenge identified will impact this.
Case 6.2
d.light: How Bringing Its Business Plan to Life Helped a Social Enterprise Get Off to a
Strong Start
DISCUSSION QUESTIONS
6-38.
Why is the problem of bringing light to people who don’t have access to
reliable electricity not being tackled in a meaningful way by a large lighting
company, such as GE (General Electric) or Philips?
Answer: The thing that Sam Goldman and his team have that a company such
as General Electric or Philips doesn’t have is the entrepreneurial zeal and
passion to totally commit to the idea of bringing light to people without reliable
electricity, and to work as many hours a week as necessary to bring the idea to
fruition. It’s very difficult for a company such as General Electric to match this
zeal and passion with “employees.” In addition, Goldman and his team have the
advantage of focusing solely on their vision. General Electric is a large
diversified company that has many product lines and pursuits, so it’s not able to
focus as intently on a single issue.
6-39.
What qualities do Sam Goldman and his team have that will help them solve the
problem of providing light to the billions of people in the world who lack access
to reliable electricity?
Answer: There are several qualities that Sam Goldman and his team have that
will help them solve the problem of providing light to the billions of the people
in the world who lack access to reliable electricity. They are as follows:
Sam Goldman has lived in villages that do not have access to electricity.
As a result, he can personally relate to the challenges that the people
d.light is building products for are experiencing.
Goldman and members of his team attended Stanford, where they
participated in an Entrepreneurial Design class. As a result, they have
been exposed to ideas and concepts that will be helpful to them in
building their business.
d.light’s entire team, from the outset, has traveled to locations where
Chapter 6: Writing a Business Plan
millions of people. A staple concept of human psychology is that people
will sacrifice and work extraordinarily hard to achieve a big goal.
Goldman and his team have participated in several high-quality business
plan competitions. Each competition provided them access to advice
from judges.
Goldman and his founders are fully committed to d.light. They passed
on corporate jobs and are focused on d.light full time.
d.light has a strong team, with a balance of business and engineering
expertise.
Goldman and his team are not reluctant to iterate on their idea based on
new information and customer feedback.
6-40.
Why does Sam Goldman go out of his way to talk about the importance of
d.light’s business plan? In what ways do you think having a meticulously
created business plan helped d.light in its launch efforts?
Answer: Apparently, Goldman and his team feel that the business plan they
developed for d.light has been a major component of the company’s success, so
they hold it in high esteem. d.light’s business plan has probably helped them in
the exact ways suggested in the chapter. As a dual-use document, it has
undoubtedly helped them develop a “road map” to follow in executing its
strategies and plans, and has provided them a selling document to show to
potential investors and other stakeholders.
6-41.
If you were one of d.light’s founders, what would your marketing strategy be?
How would you go about educating people in remote areas of the world about
your product and the benefits associated with purchasing it?
Answer: Most students will champion the idea of using rural entrepreneurs, or
indigenous personnel, who know the local customs, people, and language, to
sell its products on a commission basis. The rural entrepreneurs could not only
sell the device but educate people on the benefits of purchasing it.