SESSION 5: THE NEW BUSINESS PLANNING PROCESS

At the end of the session, learners should be able to:

1. Describe the five steps of new business planning process
2. Discuss the importance of industry and market feasibility analysis.
3. Analyze industry’s attractiveness within the competitive environment using the FIVE
FORCES MODEL developed by Michael Porter.
4. Explain the primary and secondary research tools used by a potential entrepreneur when
carrying out a product or service feasibility analysis.
5. Describe the nine elements of the business model canvas proposed by Osterwalder and
Pigner.
6. Illustrate how the business model canvas provides entrepreneurs with a framework to
guide them through the process of developing, testing and refining their business.
7. Summarize the importance of creating a business plan.
For many entrepreneurs coming up with an idea for a new business is the easiest part. Business
success requires more than a great idea. The five steps that guide the process of going from
idea generation to growing a successful business increase the entrepreneur’s chances for
launching a successful business.

1. Generating a business idea and conducting an idea assessment

2. Conducting a feasibility analysis
3. Developing a business model
4. Crafting a business plan
5. Creating a strategic plan
Generating a business idea involves coming up with many ideas and then narrowing down to
one of the most viable idea. Refer to (Session 4, identifying and recognizing an opportunity)

Idea assessment
Ideas Assessment: this is the process of examining a need in the market, developing a solution
for that need and determining the entrepreneur’s ability to turn the idea into a business. Idea
assessment helps the entrepreneur to evaluate numerous ideas. An effective tool used to help
assess ideas is the idea sketch pad. Idea assessment involves addressing five key parameters:

Customers: These are people with needs that are not being met or not fully met or not
adequately met. It involves answering basic questions about customers; Who are my
customers? How would they use the products? How many potential customers are there?
 Describe the idea of a product or service, whether you are selling a product, service,
experience or a combination of these.

Explain why the product /service will be of value to the users or buyer. How does it
address a need, current or not being met?

Unique feature that will differentiate it from competitors: Is it based on intellectual

property that you can protect.

People: this involves answering the question in regards to “who are the founding
entrepreneurs of this venture? The key personnel, the skills required, and the whether they
can be able to attract key team members.

By placing the ideas and answers to the sketch pad, entrepreneurs can clearly visualize gaps
or weaknesses in their idea. Successful entrepreneurs are not emotionally attracted to a
business idea, if the business does not show signs of success; it is discarded, if it is
promising the entrepreneur moves to the next step;

Feasibility analysis:
Feasibility analysis is an analysis of the viability of a business idea that involves an industry
analysis - business research that focuses on the potential of an industry. Studying industry
trends and using the five forces model are two techniques entrepreneurs have available for
assessing industry attractiveness.

Industry Analysis
When studying an industry, an entrepreneur considers; is the industry accessible- a realistic
place for a new venture to enter; does the industry contain markets that are ripe for innovation
or are underserved; Are there positions in the industry that will avoid some of the negative
attributes of the industry as a whole; Is it useful for a new venture to think about its position at
both the company level and the product or service level.

The environmental and business trends should be evaluated: the environmental trends comprise
of economic, social, technological and political and regulatory changes. Business trends, such
as firms in some industries benefit from an increasing ability to outsource manufacturing or
service functions to lower cost foreign labor markets, some firms are able to move customer
procurement and service functions online, at considerable cost savings while the firms in other
industries aren’t able to capture this advantage
An industry and market feasibility analysis: this involves looking into the changes taking place
in the industry, the nature of competition, and the methods of adapting to changes. This
involves evaluating the attractiveness of the industry by answering the following questions;

• How large is the industry?

• How fast is it growing?
• Is the industry characterized by high profit margins of low margins?
• How essential are the products/ services to the customers?
• What trends are shaping the industry future?
• What threats does the industry face?
• What opportunities does the industry face?
• How crowded is the industry?
• How intense is the level of competition in the industry?
• Is the industry young, mature, or somewhere in between?

This involves looking into the socio cultural, technological, demographic, economic, political,
legal and global trends. To assess the industry’s attractiveness within the competitive
environment we use the FIVE FORCES MODEL developed by Michael Porter.

Five Forces Model of industry attractiveness by Michael Porter

The five forces interact with each other to determine the setting in which companies compete
and hence the attractiveness of the industry.

Rivalry among competing firms: this is the strongest force; the four primary factors that
determine the nature and intensity of the rivalry among existing firms in an industry are: The
number and balance of competitors; the more competitors there are, the more likely it is that
one or more will try to gain customers by cutting prices, the degree of difference between
products; the degree to which products differ from one producer to another affects industry
rivalry; Rivalry is more attractive when the number of competitors is large, or quiet small,
competitors are not similar in size or capability, industry is growing at a fast pace, and
opportunity to sell a differentiated product or service; growth of an industry: competition
among firms in a slow-growing industry is stronger than among those in a fast-growth
industries; Level of fixed costs; firms with high fixed costs are anxious to fill their capacity
and this anxiety may lead to price-cutting.

The bargaining power of the suppliers to the industry is attractive when: many suppliers
sell a commodity to the companies in it, substitutes are available for the items suppliers provide,
companies in it find it easy to switch from one supplier to another or to substitute products,
items supplied constitute a small portion of the cost of the industry’s finished products. Factors
that exert pressure on buyers and suppress the profitability of the industry are: Supplier
concentration; when there are only few suppliers to provide a critical product to a large
number of buyers, the supplier has an advantage; Switching costs; these are costs that buyers
encounter when switching or changing from one supplier to another, attractiveness of
substitutes; supplier power is enhanced if there are no attractive substitutes for the products
or services the supplier offers; threat of forward integration; the power of a supplier is
enhanced if there is a credible possibility that the supplier might enter the buyers’ industry.

The bargaining power of the buyers: Buyers can suppress the profitability of the industry
from which they purchase by demanding price concessions or increases in quality ;several
factors affect buyers’ ability to exert pressure on suppliers and suppress the profitability of the
industries from which they buy, these are: Buyer group concentration; buyer’s costs; the
degree of standardization of supplier’s products; the industry is attractive when: industry
customers switching cost to competitors’ product or to substitute are high, the number of buyers
in the industry is large, customers demand for the product that are differentiated, customers
find it difficult to gather information on suppliers’ cost, prices and product features, items
companies sell to the industry account for a relatively small portion of the cost of their finished
product.

The threat of new entrants: the six major sources of barrier to entry are: Economies of scale;
an industry is more attractive to new entrants when: advantages of economies of scale are
absent,: Capital requirement: an industry is attractive if capital requirement to enter the
industry is low,: cost advantages independent of size: an industry is attractive when cost
advantages are not related to company size, buyers are not extremely brand loyal, easy for new
entrants to the industry to draw customers away from existing businesses, no legal barriers to
entry e,g through international trade policies: Product differentiation; industry with strong
brands are difficult to break into without spending heavily on advertisement; Access to
distribution channels, this is difficult especially in crowded markets such as convenience
stores; Government and legal barriers; in knowledge – intensive industries such as
biotechnology and software, patents, trademarks, and copyrights form major entry barriers.

The threat of substitute products or services; Examples of threat of substitutes are, glass
bottles and plastic bottles, newspapers and e- newspapers. An industry is attractive when:
quality substitute products are not available, price of substitutes products are not significantly
lower than those of the industry’s products, buyers cost of switching to substitutes is high.

After surveying the power of five forces on the industry, an entrepreneur can evaluate the
potential for their business to generate reasonable sales and profits in a particular industry.

Product or service feasibility analysis:

It determines the degree to which a product or service idea appeals to potential customers and
identifies the resources necessary to produce or provide the service. This portion of the
feasibility analysis addresses the question “are customers willing to purchase our goods and
services?” This involves conducting a primary research (collecting data first hand and
analyzing it) and secondary research (gathering data that has already been compiled and is
available, at a reasonable cost or even free).

Primary research tools are;

1. Customer surveys and questionnaires; word the questions carefully and avoid bias.
Survey the people who represent the target market of the business.

2. Focus group: Involves enlisting a small number of potential customers to give you
feedback on specific issues about the product or service or the business idea.

3. Prototype: this is an original functional model of a new product that entrepreneurs can
put into the hands of potential customers so that they can see it, test it and use it. They
point out potential problems in a product’s design, giving the inventors the opportunity
to fix them before they are given to customers.

4. In-home trials: involves sending researchers into customer’s homes to observe them
as they use a company’s product or service.

5. Wind shield research: it involves driving around and observing customers with similar
kinds of businesses and learning what customers like and do not like about those
businesses.

Sources of secondary research;

1. Trade associations an business directories

2. Industry data bases

3. Demographic data
4. Census data
5. Market research already compiled
6. Articles in magazines and journals
7. Local department data
8. The internet
Financial feasibility analysis
Can the business generate adequate profits? This involves including;

• Capital requirements: entrepreneurs may start with little funding by employing the
techniques of bootstrapping: the process of finding creative ways to exploit
opportunities to launch and grow business with limited resources available.

• Estimated earnings potential of the proposed business.

• Return on investment: measure the rate of return on the capital invested: calculated by
dividing the estimated earnings by the amount of invested capital.

• Cash flow, a common cause of business failure is running out of cash before the
business breaks even and can support itself through the cash flow from operations.
During the planning stage, the entrepreneur should estimate the total cash it will take to
sustain the business until the business achieves the break-even cash flow.

Entrepreneur feasibility: Do I have the skills of an entrepreneur?

This is known as entrepreneur’s readiness; i.e., knowledge experience, skills necessary to
succeed. It is also important to assess whether the business can meet the financial and non-
financial needs of the entrepreneur.

Personal entrepreneurial readiness questions`

• Why do you want to start a business?

• How many hours are you willing and able to put into your new venture/
• How would you describe your tolerance for uncertainty and risk?
• Do you easily other people working with you on a common activity? Why or why not?
• How much financial risk are you willing to take with your new venture (personal assets,
personal debt)?
• Assume you start a business, a short time later you see someone else has started the
same business and is doing well. How would you feel? Why?
• What are the non-financial risks for you in staring a new business?

• How do you react to failure? Give examples?

• How do you react in times of personal stress? How do you deal with stress in your life?
• How much income do you need to support your current lifestyle/
• How long can you survive without a paycheck?
• How much money do you have available to start your business?
• Which of your personal assets would you be willing to borrow against or sell to start
your business?
• Whose support is important (non-financial) for you to have before starting your
business (family, spouse, friends)?
Developing and testing a business model
Osterwalder and Pigner developed a business model canvas that provides entrepreneurs with a
framework to guide them through the process of developing, testing and refining their business
model; it has nine elements:

1. Customer segments: identify the customers who have clearly defined need. Narrowing
the target market enables a small company to focus its limited resources on serving the
needs of a specific group of customers rather than attempting to satisfy the desires of
the mass media. This involves defining the target market. It may be a market niche,
mass market, segmented based on age, gender, geography or socioeconomic grouping.

2. Value proposition; this is the collection of products or services the business will offer
to meet the needs of the customers. The things that will set the business apart from its
competitors, such as pricing, quality, features, product availability and other features.
The entrepreneur may have to adjust the product or service to fit it with what the
customer actually wants. It could be something about the product such as price and
value, features, performance, durability or design or it might be something emanating
from the personnel of the company, including their expertise, responsiveness or
reliability.

3. Customer relationships: this involves answering the questions such as; how do
customers want to interact with the business? Do you want intensive personal service
or limited engagement or automated interaction? There is no one best approaches to
customer relationship for all businesses, but there is one best approach for each
particular business model.

4. Channels: this refers to communication channels and distribution channels and

promotion channels. Communication refers to where customers go to seek out
information about the product. It could be websites , social network, blogs,
advertisements, experts etc. The distribution channel defines the most effective way to
get products to the customers. For some business models the customer may want to see
the merchandise, touch it and interact with it in an exciting new retail location. The
entrepreneur must determine where the customer wants to make the purchase and then
determine the most effective way to get it to the customer at that location.

5. Key activities: the focus is on the important things the entrepreneur must do to ensure
a successful launch and to sustain the growth of the business. It is contained in the
business plan.

6. Key resources: this refers to human, capital and intellectual resources needed for the
business to be successful. The business plan provides the opportunity to explain these
in greater details and develop all the necessary cost estimates for the financial forecasts.

7. Key Partners: this includes key suppliers, key outsourcing partners, investors, industry
partners, advisers, and all other external businesses or entities that are critical to make
 the business model work. This involves building a network of relationships when
launching and growing the business.

8. Revenue streams; how will the product generate revenue? The sources of cash for the
business.

9. Cost structure: this refers to the fixed and variable costs that are necessary to make
the business model work.

Developing the business is a four-phase process: (business modeling process)

Develop the business model canvas; it allows all of the team members involved in the start-up
to work from a common framework. The team documents all the hypothesis about the business
model that require further investigation and keeps track of changes in the model that result
from testing hypothesis.

The second phase is designing the business model is to test the problem that the team thinks
the business solves through its core value proposition. This is best done with the primary
research data, by engaging with real customers. The team asks the following questions: Do we
really understand the customer problem the business model is trying to address? Do these
customers care enough about this problem to spend their hard-earned money on our product?
Do these customers care enough about our product to help us by telling others through word-
of-mouth?

The third phase is to test the solution to the problem in the market. One technique is to test the
solution offered by the business model involves business prototyping. This involves testing the
business model on a small scale before committing significant resources to launch a business.

The fourth phase is to make changes and adjustments in the business, called pivots; this is the
process of making changes and adjustments to a business model on the basis of the feedback a
company receives from customers.

Creating /writing a business plan

This is a written summary of an entrepreneur’s proposed business venture, its operational and
financial details, its marketing opportunities and strategy and its manager’s skills and abilities.

This is a planning tool that builds on the foundations of the idea assessment, feasibility analysis
and the business model. It provides a more comprehensive and detailed analysis in the business
planning process. It describes in greater detail how to turn the business model into a successful
business. It guides the entrepreneur as they start their businesses and helps them acquire the
necessary financing to start the business. Research has shown that companies that engage in
planning outperform those that do not plan. It offers:

• A way to determine the principal risks facing the venture.

• A plan for managing the business successfully during its start –up
• A systematic, realistic evaluation of a venture’s success in the market
• A tool for comparing actual results against targeted performances.
• An important tool for attracting capital in the challenging financial market.

Companies without clear strategies for business growth may succeed in the short run, but as
soon as competitive conditions set in, they hit the wall and fall. In today’s global competitive
environment, any business, large or small that is not acting strategically is likely to fail.
Companies must be adaptive to change, create change, experiment with new business models
and break away from traditional rules.

The business plan should contain in detail the following sections:

1. The business description section

2. The marketing plan section
3. The organization/ management plan
4. Operational plan
5. Financial plan
6. Executive summary

BENEFITS OF CREATING A BUSINESS PLAN

1. An increase in the chances or likelihood of success of a new business.

It describes which direction the business will take

It is an entrepreneur’s road map on the journey towards building a successful business

It is a proof that the entrepreneur has performed the necessary research, studied the business
opportunity adequately and is prepared to capitalize on it with a sound business model.

It provides operational tools such as the mission statement, objectives, targets markets and
entry strategies to help entrepreneurs subject their ideas to one last test of reality before
launching the business

It is a tool for acquiring financing

A tool to obtain partners and venture capital providers.

Inside the firm, the plan helps the company develop a road map to follow to execute its
strategies and plans.
Outside the firm, it introduces potential investors and other stakeholders to the business
opportunity the firm is pursuing and it plans to pursue it.

Who reads the business plan and what are they looking for?

The firm’s employees: it articulates the vision and future plans of the firm. It is useful for
functional department heads of a young firm. It outlines the business future strategies and goals
and can help young managers work consistently with the overall plans and direction of the firm.

Investors and other external stakeholders; They are being recruited to join a firm such as
investors, potential business partners and key employees.

Business plan outline;

1. Cover page
2. Table of contents
3. Executive summary
4. Industry analysis; industry size, growth rate and sales projections; industry structure,
nature of participants, key success factors, industry trends, long-term prospects.
5. Company description, company history, mission statement, products and services,
current status, legal status and ownership and key partnerships (if any)
6. Market analysis; market segmentation and target market selection, buyer behavior,
competition analysis, estimates of annual sales and market share.
7. The economics of the business; revenue drivers and profit margins, fixed and variable
costs, operating leverage and its implications, startup costs, breakeven chart and
analysis
8. Marketing plan, overall marketing strategy. Product, price, promotion and distribution,
sales process (or cycle), sales tactics.
9. Design and development plan, development status and tasks, challenges and risks,
projected development costs, proprietary issues (patents, trademarks, copyrights,
licenses, brand names.)
10. Operations plan. General approach to operations, business location, facilities and
equipment.
11. Management team and company structure; management team skills and profile, Board
of directors, advisers, and overall schedule.
12. Financial projections, sources and uses of funds, proforma income statement, balance
sheet, cash flows and ratio analysis.

Building a strategic plan

To be successful, entrepreneurs must adapt to changes in the marketplace. Strategic planning
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 the course. A strategic plan
provides employees and managers a sense of direction when everyone is involved in creating
and updating it. It gives everyone targets to shoot for and it provides a yardstick for measuring
actual performance against those targets, especially in the startup phase of the business.

The biggest change entrepreneur’s face in the contemporary world is the shift from financial
capital to intellectual capital. Knowledge is today a crucial factor of production. Intellectual
capital is the source of a company’s competitive advantage in the marketplace. Intellectual
capital is comprised of three components:

1. Human capital consists of talents, creativity, skills and abilities of a company’s

workforce and shows up in the innovative strategies, plan and processes the people in
an organization develop and then passionately pursue.
2. Structural capital is the accumulated knowledge and experiences that a company
possesses, it can take the form of processes, software, patents, copyright, knowledge
and experience of the people in the company.
3. Customer capital is the established customer base, positive reputation, ongoing
relationships, and goodwill that a company builds up over time with its customers.

The above intangible capital base must be managed carefully. The goal of developing a
strategic plan is to create for the small company 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 competition.) It is the differentiating factor that makes customers want to
buy from your business rather than from your competitors

Entrepreneurs should examine five aspects of their businesses to define their company’s
competitive advantage;

1. The products they sell; what is unique about the products that the company sells; save
customer’s time or money, more reliable, save energy, protect environment, provide
more convenience?
2. Service they provide; excellent service that differentiate their company.
3. Pricing they offer: and the value of the product they offer
4. Way they sell: 24-hour service
5. Values to which they are committed. And operate in an ethical and socially responsible
fashion.

The key to success is building the company’s strategy on its core competencies (unique set of
capabilities that a company develops in key areas such as superior quality, customer service,
innovation, team building, flexibility and responsiveness) and concentrating them on providing
value for target customers.
Successful small companies are able to build strategies that exploit all the competitive
advantages that their size gives them by doing the following;

➢ Respond quickly to customers’ needs

➢ Providing the desired level of customer service
➢ Remaining flexible and willing to change
➢ Constantly searching for new, emerging market segments
➢ Building and defending small market niches
➢ Personal service and loyalty
➢ Remaining entrepreneurial and willing to take risks and act with speed.
➢ Constantly innovating.

Strategic management is a continuous process that consists of nine steps:

1. Develop a clear vision and translate it into a meaningful mission statement

2. Assess the company’s strength and weaknesses
3. Scan the environment for significant opportunities and threats facing the business.
4. Identify the key factors for success in the business
5. Analyze the competition
6. Create company goals and objectives
7. Formulate strategic options and select the appropriate strategies.
8. Translate strategic plans into action plans.
9. Establish accurate controls.

Conclusion;

Entrepreneurs can follow five steps to guide the process of turning a great new idea into a
successful business. These are:

• To assess the ideas by examining a need in the market, developing a solution for that
need and determining the entrepreneur’s ability to successfully turn the idea into a
business.
• To conduct feasibility analysis to determine whether the entrepreneur can transform
the idea into a viable business.
• To develop and test the business model in order to understand all that will be required
to launch and build the business
• The crafting of a business plan
• The writing of a strategic plan