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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
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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
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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
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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
