MBA ENTREPRENEURSHIP NOTES

PART 3 - FROM THE OPPORTUNITY TO THE BUSINESS PLAN

7 The Business Plan: Creating and Starting The Venture

Business Plan – written document describing all relevant internal and external elements and
strategies for starting a new venture

An Upside-Down Pyramid Approach to Gathering marketing Information

General environmental and demographic trends

National food industry trends

Local environmental and

demographic trends

Local food industry

trends

local competition
strengths and
weaknesses

Market Positioning

Market Objectives

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Operations Information Needs

o Location
o Manufacturing operation
o Raw materials
o Equipment
o Labour skills
o Space
o Overhead

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Outline of a Business Plan

I. Introductory Page
A. Name and address of business
B. Name(s) and address(es) of business
C. Nature of business
D. Statement of financing needed
E. Statement of confidentiality of report
II. Executive Summary
- Two or three pages summarizing the complete business plan
III. Industry Analysis
A. Future outlook and trends
B. Analysis of competitors
C. Market segmentation
D. Industry and market forecasts
IV. Description of Venture
A. Product(s)
B. Service(s)
C. Size of business
D. Office equipment and personnel
E. Background of entrepreneur(s)
V. Production Plan
A. Manufacturing process (amount subcontracted)
B. Physical plant
C. Machinery and equipment
D. Names of suppliers of raw materials
VI. Operations Plan
A. Description of company’s operation

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B. Flow of orders for goods and/or services

C. Technology utilization
VII. Marketing Plan
A. Pricing
B. Distribution
C. promotion
D. Product forecasts
E. Controls
VIII. Organizational Plan
A. Form of ownership
B. Identification of partners or principal shareholders
C. Authority of principals
D. Management team background
E. Roles and responsibilities of members of organisation
IX. Assessment of Risk
A. Evaluate weakness(es) of business
B. New technologies
C. Contingency plans
X. Financial Plan
A. Assumptions
B. Pro forma income statement
C. Cash flow projections
D. Pro forma balance sheet
E. Break-even analysis
F. Sources and application of funds
XI. Appendix ( contains backup material)
A. Letters
B. Market research data
C. Leases or contracts
D. Price list from suppliers

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Executive summary – should stimulate the interest of potential investor(s) and determine if the
entire plan worth reading. Issues to be highlighted:

i. What is the business concept or model?

ii. How is the business concept or model unique?
iii. Who are the individual starting the business?

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iv. How will they make the money and how much?
v. Exiting strategy

Environmental analysis – assessment of external uncontrollable variables that may impact the
business plan

Industry analysis – reviews industry trends and competitive strategies

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Critical issues for environmental and industry analysis

1) What are the major economic, technological, legal, and political trends on a national
and an international level?
2) What are total industry sales over the past five years?
3) What is the anticipated growth in this industry?
4) How many new firms have entered this industry in the past three years?
5) What new products have been recently introduced in this industry?
6) Who are the nearest competitors?
7) How will your business operation be better than this?
8) Are the sales of each of your major competitors growing, declining, or steady?
9) What are the strengths and weaknesses of each of your competitors?
10) What trends are occurring in your specific market area?
11) What is the profile of your customers?
12) How does your customer profile differ from that of your competition?

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Description of the venture – provides complete overview of the product(s), service(s), and
operations of a new venture

Describing the venture

1) What is the mission of the new venture?

2) What are your reasons going into business?
3) Why will you be successful in this venture?
4) What development work has been completed to date?
5) What is your product(s) and/or service(s)?
6) Describe the product(s) and/or service(s), including patent, copyright, or trademark
status.
7) Where will the business be located?
8) Is your building new? Old? In need of renovation? (if renovation needed, state the cost.)

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9) Is the building leased or owned? (state the terms)

10) Why is this building and location right for your business?
11) What office equipment will be needed?
12) Will equipment be purchased or leased?
13) What experience do you have and/or will you need to successfully implement the
business plan?

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Production plan – details how the production(s) will be manufactured

Production plan

1) Will you be responsible for all or part of the manufacturing operation?

2) If some manufacturing is subcontracted, who will be the subcontractors? (Give names
and addresses.)
3) Why were these subcontractors selected?
4) What are the costs of the subcontracted manufacturing? (Include copies of any written
contracts.)
5) What will be the layout of the production process? (Illustrate steps if possible.)
6) What equipment will be needed immediately for manufacturing?
7) What raw materials will be needed for manufacturing?
8) Who are the suppliers of new materials and what are the appropriate costs?
9) What are the costs of manufacturing the product?
10) What are the future capital equipment needs of the venture?

If a retail operation or services:

1) From whom will the merchandise be purchased?

2) How will the inventory control system operate?
3) What are the storage needs of the venture and how will they be promoted?
4) How will the goods flow to the customers?
5) Chronologically, what are the steps involved in a business transaction?
6) What are the technology utilization requirements to service customers effectively?

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Organization structure

1) What is the form of ownership of the organization?

2) If a partnership, who are the partners and what are the terms of agreement?
3) If incorporated, who are the principal shareholders and how much stock do they own?

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4) How many shares of voting or nonvoting stock have been issued and what type?
5) Who are the members of board of directors? (give names, addresses, and resumes)
6) Who has check-signing authority or control?
7) Who are the members of the management team and what are their backgrounds?
8) What are the roles and responsibilities of each member of the management team?
9) What are the salaries, bonuses, or other forms of payment for each member of the
management team?

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Assessment of risk – identifies potential hazards and alternative strategies to meet business
plan goals and objections

Why some business plans fail:

o Goals set by the entrepreneur are unreasonable

o Objectives are not measurable
o The entrepreneur has not made a total commitment to the business or to the family
o The entrepreneur has no experience in the planned business
o The entrepreneur has no sense of potential threats or weaknesses to the business
o No customer need was established for the proposed product or service.

8 The Marketing Plan

Marketing plan – describe market conditions and strategy related to how the product(s) and
service(s) will be distributed, priced, and promoted

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Competitor analysis

An assessment of competitor marketing strategies and strengths and weaknesses

Competitor A Competitor B Competitor C

Product or service strategies
Pricing strategies
Distribution strategies
Promotion strategies
Strengths and weaknesses

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Marketing research for the new venture

o Step one: defining the purpose or objectives

➢ How much would potential customers be willing to pay for the product or
services?
➢ Where would potential customers prefer to purchase the product or services?
➢ Where would the customer expect to hear about or learn about such a product
or services?
o Steep two: gathering data from secondary sources
➢ Websites
➢ Government departments
➢ Any available bodies
o Step three: gathering information from primary sources
➢ Data collection – observation, networking, interviewing, focus groups,
experimentation
➢ A comparison of survey method
Characteristics of methods
Method Costs Flexibility Response Speed Depth
rate
Telephone Can be Some Good Fastest; Can Least detailed
inexpensive, flexibility; response rate contact many because of 8
depending on possible to possible respondents in – 10 minute
telephone clarify or (possible 80%) a short period. time
distance and explain depending on limitation.
length of questions. not-at-homes
interview. or refusals.
Mail Can be No flexibility; Poorest Slowest. Time Some depth
inexpensive, questionnaire response since required to possible since
depending on is self- respondent mail and wait respondent
number of units administered. has choice of for response. completes
mailed and Instrument whether to questionnaire
weight needs to be complete at one’s
self- questionnaire. leisure
explanatory.
Personal Most expensive. Most flexible; The most Somewhat Most detailed
Requires face-to- because face- effective slow; dead because of
face contact. to-face because face- time needed open-ended
contact. to-face for travel. questions.
contact.
Internet Inexpensive No flexibility; Good Very fast; Some depth
self- response rate questionnaire possible since
administered. with is sent respondent
incentives, but electronically. completes
still relatively questionnaire
new method. at one’s
leisure

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o Step four: analyzing and interpreting the results

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Understanding the marketing plan

• Where have we been?

• Where do we want to go?
• How do we get there?

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Characteristics of a marketing plan

• Should provide a strategy for accomplishing the company mission or goal.

• Should be based on facts and valid assumptions. Must provide for the use of existing
resources.
• Appropriate organization must be described to implement the marketing plan.
• Should provide continuity so that each marketing plan can build on it; go for longer-term
goals and objectives.
• It should be simple and short.
• The success of the plan may depend on its flexibility. Incorporate contingency plans.
• Specify performance criteria that will be monitored and controlled.

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Facts needed for market planning

• Who are the users, where are they located, how much do they buy, from whom do they
buy, and why?
• How have promotion and advertising been employed and which approach has been
most effective?
• What are the pricing changes in the market, who has initiated these changes, and why?
• What are the market’s attitudes concerning competitive products?
• What channels of distribution supply consumers, and how do they function?
• Who are the competitors, where are they located, and what advantages/disadvantages
do they have?
• What marketing techniques are used by the most successful competitors? By the least
successful?
• What are the overall objectives of the company for the next year and five years hence?

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• What are the company’s strengths? Weaknesses?

• Why are one’s production capabilities by product?

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Marketing plan – written statement of marketing objectives, strategies, and activities to be

followed in business plans

Marketing system - interacting internal and external factors that affect venture’s ability to
provide goods and services to meet customer needs

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The Marketing System

External environment
Economy
Culture
Technology feedback
Demand
Legal considerations
Raw materials
Marketing-mix decisions
Competitions
Marketing
Market- Purchase
Entrepreneur strategies
planning decisions of
directed to
decisions customers
Internal environment customers
Financial resources
Suppliers
Goals and objectives
Management team

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Marketing mix – combination of product, price, promotion, and distribution and other
marketing activities needed to meet marketing objectives

Types of pricing - Cost based, competition based, skimming, mark up, psychology.
One of the important initial considerations in any pricing decision is to ascertain the cost
directly related to the product or services.

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Major considerations in channel selection

• Degree of directness of channels

➢ Market conditions – concerned whether end users are concentrated (direct) or
dispersed (indirect) in market.
➢ Product attributes – concerned with whether product is large (direct) or small (indirect),
bulky (direct), perishable (direct), hazardous (direct), expensive (direct).
➢ Cost benefits – considers the cost benefits in selection of channel members; many
benefits (indirect) minimal or no benefit (direct)
➢ Venture attributes – considers financial strength, size, channel experience, and
marketing strategy of venture
• Number of channel members
➢ Intensive – selection of as many retailers and/or wholesalers as possible
➢ Selective – choose only small number of channel members based on some set of criteria
or requirements
➢ Exclusive – select only one wholesaler and/or retailer
• Criteria in selection of channel members
➢ Reputation
➢ Services provided
• Number of channels
➢ One channel for one target market or multiple target markets
➢ Multiple channels for one target market or multiple target markets

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Situation analysis – describes past and present business achievements of new venture

Target market – specific group of potential customers toward which venture aims its marketing
plan

Marketing segmentation – process of dividing a market into definable and measurable groups
for purposes of targeting marketing strategy

Marketing goals and objectives – statements of level of performance desired by new venture

Marketing strategy and action plan – specific activities outlined to meet the venture’s business
plan goals and objectives

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9 The Organizational Plan

Organization plan – describes form of ownership and lines of authority and responsibility of
members of new venture

Proprietorship – form of business with single owner who has unlimited liability, controls all
decisions, and receives all profits

Partnership – two or more individuals having unlimited liability who have pooled resources to
own a business

Corporation – separate legal entity that is run by stockholders having limited liability

C Corporation – most common form of corporation, regulated by statute and treated as a

separate legal entity for liability and tax purposes

S corporation – special type of corporation where profits are distributed to stockholders and
taxed as personal income

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Factors in Three Forms of Business Formation

Factors Proprietorship Partnership Corporation

Ownership Individual No limitation on number of
partners
Liability of owners Individual liable for business In general partnership, all
liabilities individuals liable for business
liabilities. Limited partners are
liable for amount of capital
contribution. In limited liability
partnership (LLP), there is no
liability except when negligence
exists.
Costs of starting None, other than filing fees for Partnership agreement, legal
trade time cost, and minor filing fees for
business trade name.
Continuity of Death dissolves the business Death or withdrawal of one
partner terminates partnership
business unless partnership agreement
stipulates otherwise. Death or
withdrawal of one of limited
partners has no effect on
continuity.
Transferability of Complete freedom to sell or General partner can transfer
transfer any part of business his/her interest only with
interest consent of all other general
partner. No transfer of interest
in an LLP.
No limitation on number of
stockholders.
Amount of capital contribution
is limit of shareholder liability.
Created only by statute. Articles
of incorporation, filing fees,
taxes and fees in which
corporation for states registers
to do business.
Greatest form of continuity.
Death or withdrawal of
owner(s) will not affect legal
existence of business.
Most flexible. Stockholders can
sell or buy stock at will. Some
stock transfers may be
restricted by agreement. In S
corporation, stock may be
transferred only to an
individual.

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Capital requirements Capital raised only by loan or
increased contribution by
proprietor
Management control Proprietor makes all decisions
and can act immediately
Distribution of profits Proprietor responsible and
receives all profits and losses
and loses
Attractiveness for Depends on capability of
proprietor and success of
raising capital business
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Loans or new contributions by
partners require a change in
partnership agreement. In LLP
partnership, entity raises
money.
All general partners have equal
control, and majority rules.
Limited partners have limited
control. Can vary in LLP.
Depends on partnership
agreement and investment by
partners.
Depends on capability of
partners and success of
business.
New capital raised by sale of
stock or bonds or by borrowing
(debt) in name of corporation.
In S corporation, only one class
of stock and limited to 100
shareholders.
Majority shareholder(s) have
most control from legal point of
view. Day-to-day control in
hands of management, who
may not be major stockholders.
Shareholders can share in
profits by receipt of dividends.
With limited liability for owners,
more attractive as an
investment opportunity.

S Corporation
Advantages
• Capital gains and losses from the
corporation are treated as personal
income or losses by the shareholders on a
pro rata basis (determined by number of
shares of stock held). The corporation is
thus not taxed
• Shareholders retain the same limited
liability protection as the C corporation
• The S corporation is not subject to a
minimum tax, as in the C corporation
• Stock may be transferred to low-income-
bracket family members (children must
be 14 years or older)
• Stock may be voting or nonvoting
• This form of business may use the cash
method of accounting
• Corporate long-term capital gains and
losses are deductible directly by the
shareholders to offset other personal
capital gains or losses
Disadvantages
• Even with the regulations passed in 1996
and 2004, there are still some restrictions
regarding qualification for this form of
business
• Depending on the actual amount of the
net income, there may be a tax
advantage to the C corporation. This will
depend on the company payout ratio, the
corporate tax rate, the capital gains tax
rate for the investor, and the personal
income tax rate of the investor
• The S corporation may not deduct most
fringe benefits for shareholders
• The S corporation must adopt a calendar
year for tax purposes
• Only one class of stock (common stock) is
permitted for this form of business
• The net loss of the S corporation is
limited to the shareholder’s stock plus
loans to the business
• S corporations cannot have more than
100 shareholders

The Limited Liability Company (LLC)

• Corporation has shareholders, partnership has partners, LLC has members

• No shares of stock are issued, and each member owns an interest

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• No unlimited liability
• Members may transfer their interest with written consent of the remaining members

Advantages of an LLC
• Partners can add their proportionate shares of the LLC liabilities to their partnership
interests
• More individuals, corporations, partnerships, trusts, or other entities can join to organize or
form an LLC. This is not feasible in S corporation
• Members are allowed to share income, profit, expense, deduction, loss and credit, and
equity of the LLC among themselves

Designing the Organisation

• Organization structure
• Planning, measurement, and evaluation schemes
• Rewards
• Selection criteria
• Training

Stages in Organisation Design

Stage 1

President

Production Marketing/Sales Administration

Stage 2

President

Administrative
Production manager Marketing manager
manager

Promotion
Quality control Assembly Sales Finance accounting Purchasing Shipping/receiving
advertising

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Building the management team and a successful organization culture

• Execute the business plan

• Identify fundamental changes in the business as they occur
• Adjust the plan based on the environment and market that will maintain profitability

10 The Financial Plan

Financial plan – projections of financial key data that determine economic feasibility and
necessary financial investment commitment

Liabilities are money that is owed to creditors.

Pro forma income is a projected net profit calculated from projected revenue minus projected
costs and expenses.

Pro forma cash flow is the projected cash available calculated from projected cash
accumulations minus projected cash disbursement.

Pro forma balance sheet is the summaries of the projected assets, liabilities, and net worth of
the new venture.

Owner equity is the amount owners have invested and/or retained from the venture operation.

Breakeven is the volume of sales where the venture neither makes a profit nor incurs a loss.
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
B/E (Q) = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 –𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 (𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛)

Pro forma sources and applications of funds – summarizes all the projected sources of funds
available to the venture and how these funds will be disbursed

Assets are items that are owned or available to be used in the venture operation.

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