BUSINESS PLAN

What is a business plan?

A written representation of where an
enterprise is going, how it will get there and
what it will look like when it gets there.
A business plan is a formal document contains
the goals of an organisation and how that
organization intends to achieve those goals
 Purpose of a Business Plan
A Management Tool
• A business plan guides the entrepreneur over
the entire life span of the business.
• It is thus a living document that helps realize
the organization’s goals.
• It can be modified as the company matures
and as the market evolves.
 Purpose of a Business Plan
A Problem-Solving Document
• The process of developing a business plan helps the entrepreneur
address potential problems proactively.
• Writing a proper business plan helps him or her anticipate and
prepare for pitfalls.
• The capacity of a business plan to solve or prepare the business for
problems is amplified when others review the business plan.
Provides Analytical Discipline
Building a business plan forces the entrepreneur to think through
his or her steps thoroughly before putting resources or time into the
business.
It is much better to fail on paper than to fail in practice.
 Purpose of a Business Plan
Forces Industry Understanding
• While building a business plan, one gains a
better understanding of the industry as one
explores the market.
• An understanding of the industry is a critical
aspect in the journey a company takes from
start-up status to profitable business.
 Purpose of a Business Plan
Helps Attract Lenders and Investors
One of the most well know purposes of a business
plan is to get the buy in of investors.
Investors must see clearly that the entrepreneur
knows what he is up to and that the business in
question has promise before they commit resources.
In addition, following the plan helps the
entrepreneur fulfil the promise made to investors
and lenders.
 Purpose of a Business Plan
Provides Motivation to Employees
• In an ideal environment the business plan is a
leadership tool that helps top management
keep the workforce motivated.
• Sharing the business plan with employees
periodically communicates that the company
has a future they can be part of.
 Structure of a Business Plan
The key elements of a business plan are:
1. Overview of the business – what the business intends to do?
2. Products and Services – what does the business offer?
3. The Market – who are the customers and competitors? What is the
opportunity?
4. Marketing Plan – how will the offering be promoted?
5. Operational Plan – what routines will be involved in running the
business?
6. Financial Plan – what funding is required and how much revenue is
expected?
7. Credentials of the Management Team – who will steer the
business?
 Structure of a Business Plan
• Vision, Mission and Strategy
• A vision is a mental picture of the future the
founders of a company see.
• A mission is a description of the ideology that
a company is founded on.
• A strategy is a stream of decisions over time
which reflect the firm’s goals and how they
will be achieved.
 Structure of a Business Plan
Organizational Plan
This section describes how the business will be organised, how
decisions will be made.

It also describes the nature of the enterprise in terms of its form:

sole proprietorship, enterprise, or limited liability company.
Management Team
This section is the most important following the executive
summary. Here the team that will run the company day to day
is described. The credentials of the leadership team can give
investors an assurance that the new company is in safe hands.
 Structure of a Business Plan
• Industry, Market and Competition The
entrepreneur must know enough about what
he is getting into to describe the needs in the
industry, the existing players and how the new
company will fit in and succeed.
 Structure of a Business Plan
Marketing Plan
• This section details an adequate description of the
target customer, the tools and tactics that will be
used to reach that customer and organisation’s
pricing strategy among other related concerns.
• For a start-up, this is one of the most critical
aspects of the business plan. Without marketing a
start-up is practically invisible to the world.
 Structure of a Business Plan
Financial Plan
Once the company is described, the entrepreneur will want to state
the implications of the venture in terms of money. This is the part
that will tell investors what the entrepreneur is asking form.
The need to have this section in a business plan reveals the need for
any start-up to ensure that their books are being kept properly
right from the beginning.
Key financial forecasts that need to be included in the plan are the
Profit & Loss Account, Cash Flow and Balance Sheet (Evans, 2015).
Risk Assessment and Rewards
This section is intended to describe an evaluation of unfavourable
events that may occur while floating the business.
 What is a Business Model?
• “A business model represents a cognitive schema that
explains how a company creates, delivers, and
captures value by exploiting business opportunities”
(Massa et. al as cited in Frishammar & Parida, 2019).
An organization must be very clear on what the goal of
the organization is.
the goal of the company is not to churn out numbers,
the goal is to generate revenue (Goldratt, 1984).
• A business model describes how a company is doing
business.
 Business Model
• Michael J. Skok poses the questions to
entrepreneurs:
• How do you create value?
• How do you deliver value?
• How do you harness it?
• In summary, how does a business make
money (Harvard Innovation Labs, 2013).
 Types of Business Models
• Advertising
• This business model depends on creates a relationship with the client and
expects a third party to pay the bills. This would typically mean that those
paying the business are advertisers who need access to the users of the
product. Two well know examples of this are Facebook and YouTube
(Valuetainment, 2020). Organizations which use this model have to be
careful with the data management in view of regulations such as GDPR and
HIPAA (Sabastian-Coleman, 2018).
• Affiliate
• The affiliate business model is like the advertising business model, but the
advertisements are more subtle. An affiliate would typically embed links the
supplier of the product or service in online content. This approach takes
away the inconvenience to the customer of having to deal with ads while
earning money for the service provider and the affiliate.
 Business models
• Subscription
A subscription-based business model allows customers
to pay for using the product rather than for owning it.
This is the model typically used for software and cloud
services.
The cost of using the product is often much lower than
the cost of owning it and there is typically no need to
own it per se.
Microsoft and Netflix use this model to sell software
and visual content, respectively.
 Business models
Reverse Razor-Razorblade
• The Reverse Razor-Razorblade model keeps the initial
cost high while selling “disposables” at a very low price.
• The idea of this model is that the initial cost of the base
product covers the cost of the supplies and thus only
marginal profit is required when selling the supplies.
• Parsons (n.d.) cites Apple’s iPod and iTunes as an
example of this model.
•
 Business models
Disintermediation
• This business model maximizes profit by
cutting off middlemen.
• Michael Dell adopted this model in his quest
to break into the computer hardware market.
Amazon also uses this model in the deliver of
its Amazon Kindle (Parsons, n.d.).
 Business models
Razor-Razorblade This model is a well-known model
which relies on keeping the initial cost of the product
low but requiring the consumer to keep buying
disposables.
• This model is often illustrated using the shaving stick.
The shaving stick manufacturer sells the shaving stick at
a low price with the understanding that the consumer
will always return for blades (Kenton, 2019). Another
great example of the Razor-Razorblade model is the sale
of printers and ink cartridges (Hammel, 2009).
 Business models
Freemium
• A freemium business model offers a version of
the product with limited features for free but
charges for an upgrade to a richer version.
LinkedIn, Yahoo and MailChimp use this model
(Valuetainment, 2020).
 The Business Model Canvas
A business model canvas is a visual representation of a business model,
highlighting all key strategic factors.
The nine building blocks of a Business Model Canvas comprise
• customer segment,
• value proposition,
• channels,
• customer relationships,
• revenue streams,
• key resources, key activities,
• key partnerships, and
• cost structure.
• These building blocks together describe how a business creates, delivers, and
captures value through the operation of its business model
 Business Model canvas
• Together these elements provide a pretty coherent view of a business’ key drivers–
• Customer Segments: Who are the customers? What do they think? See? Feel?
Do?
• Value Propositions:What’s compelling about the proposition? Why do customers
buy, use?
• Channels:How are these propositions promoted, sold and delivered? Why? Is it
working?
• Customer Relationships:How do you interact with the customer through their
‘journey’?
• Revenue Streams:How does the business earn revenue from the value
propositions?
• Key Activities:What uniquely strategic things does the business do to deliver its
proposition?
• Key Resources:What unique strategic assets must the business have to compete?
• Key Partnerships: What can the company not do so it can focus on its Key
Activities?
• Cost Structure: What are the business’ major cost drivers? How are they linked to
revenue?
 Market Analysis
• Market Analysis is the effort an entrepreneur
makes to understand the market he or she is
developing products for. Aspects explored in
such an analysis include the size of that
market in terms of volume and value,
regulation, cultural issues, purchasing power,
trends, and the competition.
• Kotler and Keller as cited by McCarthy point
out a six-step formal process for embarking on
marketing research (McCarthy, 2015): 1.
Define the Problem and Research Objectives
2. Develop a Research Plan 3. Collect the
Information 4. Analyse the Information 5.
Present the Findings 6. Make the Decision
 Competitor Analysis
• Competitor analysis is a deeper look at one
aspect of market analysis. A modern approach
to achieving this would involve evaluating the
competitor’s website, their products, pricing,
customer reviews and customer journey. The
latter can be done by patronizing the
competition. (BigCommerce, 2015). Competitor
analysis helps take decisions around product
positioning and product differentiation.
 Risk Analysis
• Risk analysis is an attempt to anticipate the possible
problems that may occur in the course of
embarking on a business venture and taking steps
to prevent, avoid, of prepare for such negative
outcomes as the case may be. The Risk
Management Process consists of Risk Identification,
Risk Prioritization and Risk Treatment. Risk
Treatment options include Risk Avoidance, Risk
transfer, Risk Mitigation and Risk Acceptance
• SWOT Analysis SWOT is an acronym for Strength, Weaknesses,
Opportunities and Threats. In SWOT analysis, the strengths,
weaknesses, opportunities, and threats of a business are outline in
each of four quadrants as shown in Figure 5. According to Erica
Olsen (2016), “the purpose of a SWOT analysis is to create a
synthesized view of your current state.” It is in effect a situation
analysis for the company (Wolters, 2019). In Figure 5, the top part
of the SWOT contains the quadrants that represent aspects
derived from internal data – aspects that the organization can
impact and directly influence. The bottom part represents aspect
that derive from external data – aspects the organisation can
influence but cannot directly impact (Olsen, 2016).
• PESTEL Analysis and similar frameworks like PEST
and STEEPLE help the user to examine the macro-
environment of an organization (Johnson, 2019). In
other works, PESTEL is focused on external factors
that affect the organization. The original PESTEL
analysis homes in on six factors namely: Political,
Economic, Social, Technological, Ecological and
Legal. The PEST framework is limited to exploring
the first four factors while the STEEPLE frameworks
adds
• Ethical factors to the mix. These frameworks
consider both the market and nonmarket aspects
of strategy. Performing a PEST, PESTEL or STEEPLE
analysis involves outlining the specific factors
that may affect a business – either opportunities
or threats – and grouping them in the categories
specified in these frameworks. An analysis of this
nature can help paint a more intricate picture of
the business venture to investors.
• Porter’s Five Forces Professor Michael Porter of
the Harvard Business School developed the Five
Forces that shape strategy back in 1979 (Harvard
Business Review, 2008). These five forces are
explicitly stated as follows (Business To You,
2019): 1. Rivalry Among Existing Competitors 2.
Threat to New Entrants 3. Threat of Substitute
Products or Services 4. Bargaining Power of
Suppliers 5. Bargaining Power of Buyers
 Financial Analysis
• Cost-Benefit Analysis Cost-Benefit Analysis (CBA) is
an attempt to evaluate a project in the light of the
possible profits from the venture as well as the
alternatives to that venture like simply doing
nothing or embarking on a different venture. CBA.
When CBA considers only the firm in question, it is
called Financial Cost Benefit Analysis. Economic
Cost Benefit Analysis looks at how the project
impacts the larger environment (Conservation
Strategy Fund, 2014a).
• Sensitivity Analysis Sensitivity Analysis is an
attempt to dig deeper into Cost-Benefit
analysis to cater of risk and uncertainty. Using
a spreadsheet, the approach is to build a
sensitivity table and evaluate the changes in
net present value as the input costs are varied
(Conservation Strategy Fund, 2014b).
 Financial Models
• A financial model is a representation of the summary
of expenses and earnings of a business. Financial
models are used to help forecast a business’s future
performance and make decisions on investment,
growth, budgeting, asset management and business
valuation. At the beginning of a business, the figures
used in a financial model are mostly estimates and
extrapolation of the current state. The results of a
financial model typically fit at the end of a business
plan.
 Financial Models
• There are three types of financial models:
• 1. Three Statement Model 2. Discounted Cash
Flow Model 3. Industry Specific Model