978-0134741086 Chapter 5 Part 1

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CHAPTER 5. CRAFTING A BUSINESS PLAN AND BUILDING A

1. Explain the benefits of an effective business plan.

2. Describe the elements of a solid business plan.

3. Explain the “Five Cs of Credit” and why they are important to potential lenders and

investors reviewing business plans.

4. Understand the keys to making an effective business plan presentation.

5. Understand the importance of strategic management to a small business.

6. Explain why and how a small business must create a competitive advantage in the

market.

7. Develop a strategic plan for a business using the nine steps in the strategic

management process.

Part 2: Class Instruction

Introduction

The Benefits of Creating a Business Plan LO 1

The U.S. Small Business Administration reports that entrepreneurs who write business

plans early on are two–an-a-half times more likely to actually start their businesses. A

business plan is a written summary of an entrepreneur’s proposed business venture, its

operational and financial details, its marketing opportunities and strategy, and its

managers’ skills and abilities.

A business plan serves two essential functions. First, it provides a battery of tools – a

mission statement, goals, objectives, budgets, financial forecasts, target markets, and entry

strategies – to help entrepreneurs subject their ideas to one last test of reality before

1. Reality Test – proves that a market for the product or service really does exist.

This focuses on industry attractiveness, market niches, potential customers, market

2. Competitive Test – evaluates the company’s relative position to its key

competitors.

3. Value Test – convinces lenders and investors to put their money into the venture.

The Elements of a Business Plan LO 2

Every business plan is unique and must be tailored to the specific needs of the business.

There are many resources available to use as a guide. The seemingly overwhelming task of

building a business plan is easily broken down into workable parts that any student or

 Description of Firm’s Product/Service

 Business and Industry Profile

 Competitor Analysis

 Advertising and Promotion

 Market Size and Trends

 Location

 Pricing

 Distribution

Refer to Appendix A to view The Sample Business Plan Outline.

In addition, there are ten tips on preparing your business plan that can save time and help

to create a more cohesive and impressive overall plan.

1. Have an attractive cover

2. Check for spelling and grammar

3. Create a visual appeal throughout the plan

4. Include a table of contents with page numbers

5. Make it interesting and compelling

6. Demonstrate its profit potential

7. Use spreadsheets

8. Include cash flow projections

9. Keep it concise and “crisp”

10. Tell the truth – always!

What Lenders Look for in a Business Plan

LO 3

Bankers and other lenders include the “five Cs” of credit as a part of their evaluation of

the credit-worthiness of loan applications. The higher a business scores on the evaluation,

the greater its chance will be of receiving a loan based on these five criteria:

1. Capital. A small business must have a stable capital base before any lender will

grant a loan.

2. Capacity. A synonym for capacity is cash flow.

3. Collateral. This refers to assets an entrepreneur can pledge to a lender as security

for the repayment of the loan.

4. Character. An evaluation of character is based on intangible factors such as

honesty, competence, polish, determination, knowledge, experience, and ability.

5. Conditions. Factors include potential growth in the market, competition, location,

form of ownership, and the purpose of the loan.

The Pitch: Making the Business Plan Presentation LO 4

The content of the presentation should include five basic areas:

 Your company and its products and services

 Prepare and practice your delivery. Demonstrate enthusiasm, but don’t be too

emotional. Focus on communicating the dynamic opportunity your idea offers and

how you plan to capitalize on it.

 “Hook” investors quickly with an up-front explanation of the new venture, its

opportunities, and the benefits to them.

 Use visual aids. Follow Guy Kawasaki’s 10/20/30 rule for PowerPoint

Chapter 5, Page 83

emphasize the factors that make your company unique. Offer proof. Hit the

highlights. Keep the presentation crisp. Avoid the use of technical terms.

 Every lender and investor is thinking, “What’s in it for me?”

 Close by reinforcing the nature of the opportunity and the related benefits to

investors. Be prepared for questions. Anticipate the questions the audience is

most likely to ask.

 Be sensitive to issues that are most important to lenders and investors.

 Follow up with every investor to whom you make a presentation.

Consider using You Be the Consultant: “The Battle of the Plans” at this point.

Building a Strategic Plan LO 5

Once the business moves past its start-up a strategic plan becomes necessary. A solid

strategic plan provides managers and employees a sense of direction when everyone is

involved in creating and updating it.

There is a shift unfolding now in the economy from a base of financial to intellectual

capital. Intellectual capital is comprised of three components:

1. Human capital – talent, creativity, skills, and abilities of the work force.

2. Structural capital – accumulated knowledge and experience of the company.

3. Customer capital – customer base, positive reputation, relationships, and goodwill.

Successful entrepreneurs use the process of strategic management to cope with the

constantly changing competitive environment. Strategic management involves

developing a game plan to guide a company as it strives to accomplish its vision, mission,

goals, and objectives and to keep it from straying off its desired course.

Building a Competitive Advantage LO 6

The goal of developing a strategic plan is to create a competitive advantage – the value

proposition that sets a small business apart from its competitors and gives it a unique

position in the market that is superior to its rivals.

Entrepreneurs should examine five aspects of their businesses to define their companies’

competitive advantages:

 Products they sell

 Service they provide

set of core competencies that are better than their competitors. Core competencies are a

unique set of capabilities that a company develops in key areas, such as superior quality,

customer service, innovation, team building, flexibility, and responsiveness, which allow it

to vault past competitors. Refer to Figure 5.2, Building a Sustainable Competitive

Advantage. Typically a company develops core competencies in no more than five or six

 Remaining flexible and willing to change. Constantly searching for new, emerging

market segments. Building and defending small market niches.

 Erecting “switching costs,” the costs a customer incurs by switching to a

competitor’s product or service, through personal service and loyalty.

 Remaining entrepreneurial and willing to take risks and act with lightning speed.

 Use a relatively short planning horizon – two years or less.

 Be informal and not overly structured.

 Encourage the participation of employees and outside parties.

 Do not begin with setting objectives because extensive objective setting early on

Chapter 5, Page 85

 Be an ongoing process because businesses and the competitive environment in

which they operate constantly change.

The Strategic Management Process LO 7

There are nine steps in the process.

Step 1 – Develop a Clear Vision and Translate It into a Meaningful Mission Statement.

1. Provide direction

2. Determine decisions

3. Inspire people

4. Allow for perseverance in the face of adversity

The mission statement addresses the question, “What business are we in?” It must be

concise and specific so your customers understand your purpose and how you provide

value to them. Refer to Table 5.2, Tips for Writing a Powerful Mission Statement. It

includes the following elements:

competitive strategy requires a business to magnify its strengths and overcome or

compensate for its weaknesses. Strengths are positive internal factors that a company can

draw on to accomplish its mission, goals, and objectives. Examples include special skills

Chapter 5, Page 86

or knowledge, a superior proprietary product or process, a positive public image, etc.

Weaknesses are negative internal factors that inhibit a company’s ability to accomplish its

mission, goals, and objectives. Examples include lack of capital, a shortage of skilled

workers, or inability to master technology.

One technique for taking this strategic inventory is to prepare a “balance sheet” of the

company’s strengths and weaknesses. Refer to Table 5.3, Identifying Company Strengths

and Weaknesses.

Step 3 – Scan the environment for significant opportunities and threats facing the business.

Opportunities are positive external options that a firm can explain to accomplish its

mission, goals, and objectives. A small business should analyze only those that are most

Step 4 – Identify the Key Factors for Success (KSF) in the Business. Key success factors

determine a company’s ability to compete successfully in an industry. Examples include

managing costs, superior product quality, and solid relationships with suppliers. Focus on

surpassing competitors on one or two KSFs to build a sustainable competitive advantage.

Refer to Table 5.5, Identifying Key Success Factors.

Entrepreneurs can use the results of their competitive intelligence efforts to construct a

competitive profile matrix for its most important competitors. It allows the owners to

evaluate their firms against the major competitors using the KSFs for that market segment.

Refer to Table 5.6, Sample Competitive Profile Matrix.

Step 6 – Create Company Goals and Objectives. Goals are broad, long-range attributes

 Measureable

 Action commitments

 Assignable

goals, and objectives. There are three basic strategies, refer to Figure 5.4, Three Strategic

Options.

 Cost leadership strategy – the firm strives to be the lowest-cost producer relative

to its competitors in the industry.

 Differentiation strategy – seeks to build customer loyalty by selling goods or

Step 8 – Translate Strategic Plans into Action Plans. Entrepreneurs must convert strategic

plans into operating plans. Executing a strategy focuses on the purpose of the project, the

scope, contributions to other projects, resource requirements, and timing.

Step 9 – Establish Accurate Controls. Controlling plans and projects and keeping them on

schedule means that an entrepreneur must identify and track key performance indicators

and learning perspective financial perspective, and corporate citizenship.

Consider using Hands On… How To “Beat the Big Guys,” You Be the Consultant:

“The Escape Game Seeks to Expand Nationwide” or You Be the Consultant:

“Finding a Niche with a Subscription Business Model” at this point.

Conclusion

Sample Business Plan Outline

There is a comprehensive business plan outline at the end of this chapter that summarizes

universal elements that should be included in any formal plan.

Part 3: Chapter Exercises

You Be the Consultant: “The Battle of the Plans”

1. What benefits do entrepreneurs gain by competing in business plan

competitions such as the one at Texas Christian University? (LO 4) (AACSB:

2. Work with a team of your classmates to brainstorm ideas for establishing a

business plan competition on your campus. How would you locate judges? What

criteria would you use to judge the plans? What prizes would you offer the winners,

and how would you raise the money to give those prizes? Who would you allow to