CHAPTER FOUR

DEVELOPING BUSINESS PLAN

 4.1 WHAT IS A BUSINESS PLAN?
A business plan is a written document that sets out the basic idea
underlying a business and related start-up considerations.
It is a written document that the entrepreneur prepares before going to
the implementation stage.
Purpose of business plan
 Helps to crystallize the dreams and hopes that motivates the
entrepreneur to start the business.
 Helps to avoid a random jump in to a business
 Helps to quantify rough ideas on a paper
 Helps to set objectives and gives a yardstick against which to
monitor performance
 Helps to attract external fund
 Helps to take a long term view of your business and its
environment
 Helps to identify the SWOT of a business venture
Value and scope of the business plan
The entrepreneur should determine and know how valuable and detail their
business plan is. The depth and detail of the business plan depends on the size
and scope of the proposed type of new venture.
Differences in the scope of the business plan may be dependent on whether the
new venture is a service; involves a manufacturing or is a consumer good or
industrial product.
The size of the market, competition, and potential growth may also affect the scope
of a business plan.
Generally, large and rapid growth firms need to have elaborative and
comprehensive business plan than the small and slow growth ones though
success for business of all sizes is improbable without business plan.
Business plan is more valuable to the entrepreneur, potential investors, or even
for the review of new personnel. The business plan is important to these people
because:
 It helps to determine the viability of the venture in the designated market.
 It provides guidance to the entrepreneur in organizing his/her planning
activities.
The planning process forces the entrepreneur to bring objectively to the idea
and reject on such questions as:
 Does the idea make sense?
 Will it work?
 Who is my customer?
 Does it satisfy customer needs and wants?
 What kind of protection can I get against imitation by competitors?
 Can I manage such a business?
 Whom will I compete with? And so on.

USERS OF A BUSINESS PLAN

 Internal users
 External users
 USERS OF A BUSINESS PLAN

Fig: Showing stakeholders of a business plan

INFORMATION NEEDS OF AN ENTREPRENEUR
1. Market Information Needs
It should include information on competition, margins for distribution, market
trends and growth potentials as well as the important marketing mixes.
2. Operation Information Needs.
Manufacturing operations: basic machines, assembly operations &whether
any of these operations would be subcontracted and how and by whom.
Raw material: The kind and quantity of raw materials needed and supplier’s
names, addresses, and costs should be determined.
Equipments – the equipments needed should be listed and whether it will be
purchased, rented or leased also should be clearly indicated.
Labor Skills: - Each labor’s unique skill needed, the number of personnel in
each skill, pay rate and an assessment of where and how these skills will be
obtained should be identified.
Space and Area: - The total amount of space and area needed should be
determined, including whether the space and the area will be owned, leased,
rented and so on.
Over heads: - Each items needed to support production or manufacturing, such
as tools, supplies, utilities, salaries and so on, should be clearly determined.
 3. Financial Information Needs
This assessment will primarily tell potential investors if the business will be
profitable, how much money will be needed to launch the business and meet
short-term financial needs, and how this money be obtained.
There are traditionally three areas of financial information that will be needed
to ascertain the feasibility of the new venture. These are:
 Expected sales and expense for at least the first three years.
 Cash flow figures for the first three years; and
 Current balance sheet figures and pro forma (forecasted) balance sheets for the
first three years.

Technology and Internet as Sources of Information

The changing world of technology offers new opportunities for entrepreneurs to
access information for any business activities efficiently, expediently and
cheaply.
Internet (Website, e-mails or on-line services) is an important source of
information in the preparation of the business plan for industry analysis,
competitor’s analysis, and measurement of market potential, to later stage
planning and decision making.
 4.2 PREPARATION OF BUSINESS PLAN &
ITS MAJOR PARTS

A business plan generally answers three key questions;

1. Where are we now?

2. Where do we want to go?
3. How do we get there?
 OUTLINE OF THE BUSINESS PLAN

1. Introductory Page
This is the title or cover page that provides a brief summary of the business
plan’s contents. The introductory page should contain the following:
The name and address of the company
The name and address of the entrepreneur(s).
A paragraph describing the company and the nature of the business.
The amount of financing needed. The entrepreneurs may offer a package
that shows stock, debt, asset and so on. However, many venture capitalists
prefer to structure this package in their own way.
A statement of the confidentiality of the report. This is for security purpose
and is important for the entrepreneur.

2. Executive Summary
 This section of the business plan is prepared after the total plan is written.
 It would highlight concisely and convincing the key points in the business
plan, that is, the nature of the venture, financing needed, market potential,
and support as to why it will succeed.
3. Industry Analysis
Is made to know which industry the entrepreneur will be competing
in.
 Future trends and historical achievements should be included.
 Insight on new product developments in this industry.
 Competitive analysis; Each major competitor should be
identified, with appropriate strengths and weaknesses described
particularly as to how they might affect the new venture’s
potential success in the market.
 The market should be segmented and the target market for the
entrepreneur identified.
 Any forecasts made by the industry or by the government should
be noted. A high growth market may be viewed more favorably
by the potential investor.
4. Description of the Venture
This will enable the investor to ascertain the size and scope of the
business. Key elements are:
 Product(s) or service(s),
 Location and size of the business,
 Personnel and office equipment that will be needed,
 Background of the entrepreneur(s),
 History of the venture.
5. Production Plan
 If the new venture is a manufacturing operation, a production plan is
necessary. This plan should describe the complete manufacturing process.
 If some or all of the manufacturing process is to be subcontracted, the
plan should describe the subcontractor(s), including location, reasons for
selection, costs, and any contracts that have been completed.
 If the manufacturing is to be carried out in whole or in part by the
entrepreneur, he/she will need to describe the physical plant lay out; the
machinery and equipment needed to perform the manufacturing
operations; raw materials and suppliers’ names, addresses, and terms;
costs of manufacturing; and any further capital equipment needs.
 If the venture is not a manufacturing operation but a retail store or
service, this section would be titled “merchandising plan” and purchase
of merchandise, inventory control system, and storage needs should be
described
6. Marketing Plan
The marketing plan is an important part of the business plan
since it describes how the product(s) or service(s) will be priced,
promoted and distributed.
Classification of customers, buying decisions and benefits to
customers have to be addressed.
Specific forecasts for product(s) or service(s) are indicated in
order to project profitability of the venture.
The budget and appropriate controls needed for marketing
strategy decision should be discussed.
7. Organizational Plan
The organizational plan describes the venture’s form of
ownership-that is, proprietorship, partnership, or corporation.
For instance, if the venture is a partnership, the terms of the
partnership should be included. If the venture is a corporation, it
is important to detail the shares of stock authorized, share
options, names and addresses and resumes of the directors and
officers of the corporation.
It is also helpful to provide an organization chart indicating the
line of authority and the responsibilities of the members of the
organization.
8. Assessment of Risk
Every new venture will be faced with some potential hazards, given the
particular industry and competitive environment.
It is important that the entrepreneur makes an assessment of risk and
prepares an effective strategy to deal with them.
Major risks for a new venture could result from;
o Competitor’s reaction;
o Weaknesses in the marketing or production, and
o New advances in technology that may make the new product
obsolete.
It is also useful for the entrepreneur to provide alternative strategies
should any of the above risk factors occur. These contingency plans and
strategies illustrate to the potential investor that the entrepreneur is
sensitive to important risks and is prepared should any occur.
9. Financial Plan
It determines the potential investment commitment needed for the new venture
and indicates whether the business plan is economically feasible.
Generally, three financial areas are discussed in this section of the business
plan.
1.The entrepreneur should summarize the forecasted sales and the
appropriate expenses for at least the first three years, with the first year’s
projections provided monthly. It includes the forecasted sales, cost of goods
sold, and the general and administrative expenses. Net profit after taxes can
then be projected by estimating income taxes.
2.Cash flow figures must be presented for at least the first three years, with the
first year’s projections provided monthly. Since bills have to be paid at different
times of the year, it is important to determine the demands on cash on a monthly
basis, especially in the first year. Remember that sales may be irregular, and
receipts from customers may also be spread out, thus necessitating the
borrowing of short-term capital to met fixed expenses such as salaries.
3. The last financial item needed in this section of the business plan is the
projected balance sheet. This shows the financial condition of the business at
a specific time. It summarizes the assets of a business, its liabilities, the
investment of the entrepreneur and any partners, and retained earnings or
cumulative losses. Any assumptions considered for the balance sheet or any
other item in the financial plan should be listed for the benefit of the potential
investor.

10. Appendix
• The appendix of the business plan generally contains any backup material that
is not necessary in the text of the document. Reference to any of the documents
in the appendix should be made in the plan itself.
• Letters from customers, distributors, or subcontractors are examples of
information that should be included in the appendix.
• Any documentation of information, that is, secondary data or primary research
data used to support plan decisions, should also be included.
• Leases, contacts, or any other types of agreements that have been initiated
may also be included in the appendix.
• Lastly, price lists from suppliers and competitors may be added.
 USING AND IMPLEMENTING THE BUSINESS PLAN
The business plan is designed to guide the entrepreneur through the first
year of operations. It is important that the implementation of the strategy
contain control points to ascertain progress and to initiate contingency
plans, if necessary.
It is also important to realize that without good planning the employees will
not understand the company’s goals and how they are expected to
perform in their jobs.
Many businesses fail because of the entrepreneurs’ inability to plan
effectively.
In addition, the entrepreneur can enhance effective implementation of the
business plan by developing a schedule to measure progress and to
institute contingency plans.
 Measuring Plan Progress
During the introductory phases of the start-up, the entrepreneur should determine
the following control elements ;
Inventory control: by controlling inventory, the firm can ensure maximum
service to the customer.
Production control: compare the cost figures estimated in the business plan
against day-to-day operation costs. This will help to control machine time,
worker hours, process time, delay time, and other cost.
Quality control: this will depend on the type of production system but is
designed to make sure that the product performs well.
Sales control: information on units, Birr, specific products sold, prices,
meeting of delivery dates, and credit terms are all useful to get a good
perspective of the sales of the new venture.
Disbursements: the new venture should also control the amount of money
paid out. All bills should be reviewed to determine how much is being
disbursed and for what purpose.
 UPDATING THE PLAN

The best business plan can become out-of-date if conditions change.

Environmental factors such as the economy, customers, technology, or
competition and internal factors such as the loss or addition of key
employees can all change the direction of the business plan.
Thus, it is important to be sensitive to changes in the company, industry,
and market. If these changes are likely to affect the business plan, the
entrepreneur should determine what revisions are needed.
In this manner, the entrepreneur can maintain reasonable targets and goals
and keep the new venture on a course that will increase its chances of
success.
 (Part Two)
PRODUCT AND SERVICE CONCEPT

Overview of Product and Service

People satisfy their needs and wants with products. A product is anything
that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a want or need.
Product Classifications; Products can be classified in three groups
according to their durability or tangibility.
a) Non-durable goods: Non-durable goods are tangible goods that
normally are consumed in one or few period of time eg. Beer, soap, salt,
etc.
b) Durable goods: Durable goods are those tangible goods that usually
survive many users eg. Refrigerator, TV, clothing, etc.
c) Services: Services are activities, benefits or satisfactions that are offered
for sale eg. Haircut, repairing, etc.
Products can also be classified based on the purpose for which they are
bought as consumer and industrial product
1. Consumer Products:- are those bought by final consumers for personal
consumption. Eg., food, tooth past, cloths,…
2. Industrial Products: are products that are bought for further
processing, not for final consumption. Eg., motor, tires, nails…

4.2. Product Planning and Development process

A firm can obtain a new product in two ways:
1. Through acquisition- by buying a whole company, a patent, or a
license to produce some one else’s product.
2. Through new product development by the company’s own research
and development effort. By new product we mean original products,
product improvements, product modifications or new brands that the
firm develops through its own research and development endeavors.
Why do so many products fail? There are several reasons:
Although the idea may be good, the market size have been
overestimated
Or perhaps the actual product was not designed well
Or it was incorrectly positioned in the market, priced too high, or
advertised poorly.
Sometimes the cost of product development is higher than expected
Sometimes competitors fight back harder than expected
The remedy lies in strong new product planning and in setting up a
systematic new product development process for finding and growing
new products.
PRODUCT PLANNING AND DEVELOPMENT PROCESS
The stages of new product development include the following;
1. Idea generation
2. Idea screening
3. Concept dev’t and testing
4. Marketing strategy dev’t
5. Business analysis
6. Product dev’t physically
7. Market testing
8. Commercialization.
1. Idea generation
Is the systematic search for new product ideas & the ideas could emerge
form various sources; internal & external sources.
 Internal sources: this source includes executives, employees,
scientists, sales persons, top management etc.
 External source include customer, distributors, dealers, competitors
and other institution.

2. Idea screening
The purpose of idea generation is to create a large number of ideas from
which a few best ideas can be selected. The purpose of idea screening
is to reduce the number of ideas. Hence, the first idea reducing stage is
idea screening. In screening stage two types of errors must be avoided;
 Drop Error- which occurs when the company dismisses good idea.
 A go-error- That occurs when company permits a poor idea to move
into dep’t & commercialization.
So, the purpose of screening is to drop poor ideas as early as possible.
3. Concept development and testing
At this stage, surviving idea must now be developed into product
concepts. It is important to distinguish between a product idea, a
product concept, and a product image.
1. A product idea is an idea for a possible product that a company can
see itself offering to the market.
2. A product concept is an elaborated version of the idea stated in a
meaningful consumer stated terms.
3. The product image: is the particular picture that consumer acquires of
an actual or potential product.
Concept testing calls for testing new product concept on a sample of target
consumers using prototypes of new products.
The sample group of target customers is asked questions related to their
understanding and belief of the concept, the extent to which new
product will satisfy customer needs and problems, the use situation,
price in relation to the perceived value, purchase intentions and so on.
4. Market strategy Development
Is designing an initial marketing strategy for introducing the proposed product to
the market.
The marketing strategy statement consists of three parts:
1.The first part describes the target market: the planned product positioning, the
sales, market share & profit goals for the 1st few years
2.The second part outlines the product’s planned price, distribution and
marketing budget for the first year
3.The third part describes the planned long-run sales, profit goals and marketing
mix strategy.
5. Business Analysis
Business analysis is the basic assessment of the product’s compatibility in
market place and its potential profitability.
The size of the market and competing products, Cost-benefit analysis, the
company’s capacity to produce that new product in terms of resource availability
has to be evaluated.
If the benefit is greater than the cost, then the move to the product development is
progressed. Otherwise, the idea can be rejected at this stage also.
6. Product development
This stage is the actual product development stage. If the product concept passes
the business test, it moves to R&D and/ or engineering to be developed into
physical product.
Up to this point of time, it has existed only as a word description, a drawing or a
prototype.
Prototype product is physical product that is manufactured as per the idea of new
product to test it in the market. It is to get feed back about the reaction of
consumers, dealers, competitors, and so on.
If the image on the new product is good, then the next step is to launch the product
as per to the plan. At this stage, the company will determine whether the product
idea will be translated into a technically and commercially feasible product.
Consumer testing of the model product will make way for final selection of the
most acceptable model for mass production and distribution.
7. Marketing testing
Test marketing is a trial mini launch of product in limited areas that represent
the potential market.
After management is satisfied with the product’s functional and psychological
performance, the product is ready to be dressed up with a brand name,
packaging and preliminary marketing program. The goals are to test the new
product in some authentic consumer settings and to learn how large the
market is and how consumers and dealers react to handling, using and
repurchasing the actual product.
Market testing yields valuable information about buyers, dealers, marketing
program effectiveness, market potentials and other related matters. Market
testing is the stage where the product and marketing program are
introduced into more realistic market settings.
8. Commercialization (launching)
At this stage the entrepreneur after incorporating necessary amendments based
on consumer suggestions & comments, it can launch full scale promotional
activities. Mass production will start with improved features & distribution
channel will be organized to distribute the product.