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Business Plans

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Title: Business Plans


1
Business Plans
  • Professor Jim Nolen
  • McCombs School of Business
  • Department of Finance
  • The University of Texas at Austin

2
Purpose of Business Planning
  • Provide a roadmap for success of the company
  • Force the entrepreneur to formalize their vision
    and do the research to answer hard questions
    about the company, its industry and the
    competitive landscape
  • Set goals, strategies, policies and procedures
    for the firm
  • A tool for raising capital

3
What is a Business Plan
  • A story that explains how the enterprise work
  • Answers Peter Druckers questions
  • Who are the customers?
  • What does the customer value?
  • Answers fundamental questions about the firms
    business model
  • How do we make money in this business? How does
    money come into and go out of the company?
  • Can we deliver value to the customer at an
    appropriate cost?

4
What is a Business Model
  • A variation on the generic value chain underlying
    all businesses
  • Activities associated with making something
    designing it, purchasing raw materials,
    manufacturing, etc.
  • Activities involved in selling something finding
    and reaching customers, transacting a sale,
    distributing and delivering the product or
    service.

5
What is a Business Model
  • Similar, but not the same, as business strategy.
  • Business Models describe as a system how the
    pieces of a business fit together and do not
    consider one critical dimension performance
    Competition
  • Competitive Strategy explains how you will do
    better than your rivals in ways they can not
    duplicate

6
What is a Business Model
  • Provides a better method or process than existing
    alternatives.
  • More value to a discrete group of customers or
    filling an unmet need
  • Replace an old way of doing things process
    innovation or new distribution channels
  • Becomes the standard
  • Provides insight into the motivation of everyone
    in the value chain.
  • Capitalizes on a shift in supply or demand for
    products or services

7
Why business models succeed
  • Being at the right place at the right time
  • Adaptive to change
  • Good people will follow a visionary and a leader
  • Customers will show loyalty when treated properly
    and shown the value proposition
  • Capital will follow the management team that can
    demonstrate the ability to focus on their model
    and produce operational excellence

8
Why business models fail
  • They fail the narrative test (the story doesnt
    make sense) or the number test (the spreadsheet
    doesnt add up)
  • Examples
  • Priceline Webhouse Club Extended name your own
    pricing to groceries and gasoline. Consumers
    could specify price but not brand of peanut
    butter or gasoline, but Jiffy and Exxon did not
    want to help Webhouse teach consumers to buy on
    price alone and undermine their prices and brand
    identities. (story doesnt make sense)
  • Webvan Added costs for on-line groceries in a
    low margin industry and found customers were not
    willing to pay significantly more. (Numbers
    didnt add up)

9
Why business models fail
  • They underestimated the competition and how their
    model would stand up under pressure
  • Retaliation of existing competitors or entry of
    new competitors
  • Substitute products or services
  • They fail to adjust to economic, industry or
    competitive changes.
  • Industry Consolidation
  • Social, political, regulatory, technological, or
    environmental changes

10
Your Business Plan Should Address
  • What problem you are solving and how serious it
    is? Is it nice to have or have to have?
  • Who has this problem and why it is important to
    them? Is this a compelling purchase for the
    customer?
  • Do you have the right people to solve this
    problem?
  • How large is the market and how fast is it
    growing?
  • Who else is trying to solve the customers
    problems or provide the service? What is going to
    give you an unfair competitive advantage?
  • How are you going to generate revenue? (revenue
    model - i.e., transaction fee, flat fee,
    licensing)
  • What are your key milestones?

11
Industry Analysis
  • Few firms fail because they could not produce the
    product or service, most fail because they missed
    the market and the competition.
  • Industry Analysis Where will your company be
    positioned for profitability and cash flow
  • Supplier and Customer Power
  • Existing Rivalry and Threat of New Entrants
  • Substitutes
  • Buy Low, Sell High, Collect Early Pay Late
  • When do you have to buy and pay for resources?
  • How long does it take to acquire a customer?
  • How long before the customer sends you a check?
  • How much capital equipment is required to support
    a dollar of sales?

12
Industry AnalysisMichael Porters Five Forces
Determinates of Profitability
Current Competitors
Suppliers
The Company
Substitute Products
Potential Competitors
Customers
13
Bob Fabios Whats
  • What messages . . . to reach
  • What market(s) . . . with
  • What pain . . . that need
  • What product(s) . . . distributed through
  • What channel(s) . . . against
  • What competition . . . with
  • What pricing and packaging . . . to deliver
  • What value . . . in
  • What time frame?

14
Market Opportunity/Validation
  • How will the product or service be priced?
  • How will you reach the target customer?
  • How much does it cost to acquire a customer in
    time and ?
  • How much does it cost to produce and deliver the
    product or service?
  • How much does it cost to support a customer?
  • How easy (expensive) is it to retain a customer?

15
COMPETITION
  • Who are the current competitors?
  • What resources do they control and what are their
    strengths and weaknesses?
  • How will they respond to our decision to enter
    the business and what can we do?
  • Who else might notice and enter our market?
  • Can we build barriers to competitors by forming
    alliances?

16
How Do Businesses Compete?
  • They Fill Needs That Are Not Being Met
  • They Find Customers and Suppliers Who Are Weaker
    Than They Are
  • They Get More Out of Less
  • They Use Other Peoples Money (OPM)
  • The Try to Stay Out of the Way of Larger Meaner
    Competitors (Nibble at the Edges)

17
Company AnalysisSWOT Analysis
  • Strengths What are the companys core
    competencies? What does it do better than anyone
    else? How can the firm leverage these
    competitive advantages.
  • Weaknesses What areas does the company have a
    need for improvement? What are the obstacles for
    implementing change?
  • Opportunities What are the opportunities and
    how can the company capitalize on them. How
    important is timing to the decision?
  • Threats What are the internal and external
    threats to the company. How can the company
    mitigate these risks?

18
Financial Strategies
  • All companies have similar financial goals
    namely, to maximize shareholder wealth.
  • Companies employ different strategies and tactics
    to achieve this goal.
  • Some work off maximizing profit margins through
    differentiation or intellectual property
    (Software/ Pharmaceuticals)
  • Some work off scale (Mass Merchandisers)
  • Some work off efficient asset utilization
    (Airlines)
  • Some work off leverage (Financial Services)

19
4 Generic Strategies

Breadth of Market
Perceived Uniqueness
Commodity
Unique
Overall Cost Price Leadership
Differentiation
Industry Wide
Pharmaceuticals Niemann Marcus Rolls Royce
Southwest Airlines, Wal-Mart, Hyundi
Niche (Differentiated)
Focus (Volume)
Segment Only
Federal Express, Tyson
Pea in a Pod The Tie Rack
20
Value Drivers
  • Three-Factor DuPont Analysis for ROE

Profitability on Sales
Asset Turnover (Efficiency/Utilization)
FinancialLeverage
21
Maximize Share Value
DuPont Analysis
Risk (r)
Return (ROE)
Growth (g)
Efficiency
Leverage
Profitability
Operating DecisionsCustomers
SuppliersProducts PricingControlling
Expenses
Financing DecisionsDebt-Equity Mix Dividend
Policy
Investing DecisionsAsset Mix, NPI Cash
Conversion Cycle Plant Utilization
22
Improving ROE
  • ROE can be improved by
  • Increasing Revenue (Profitable Growth)
  • Decreasing Expense (Controlling Costs)
  • Decreasing Assets (Increasing Asset
    Efficiency/Utilization)
  • Increasing Liabilities (Increased Leverage
    Other Peoples Money)
  • All of these are constrained by economic,
    industry and competitive forces and affect the
    risk and value of the firm.

23
Elevator Pitch
  • Bill Gates and Michael Dell are in the Elevator
    with money to burn.
  • What do you say to them to get them excited about
    your project?
  • Before they get off on the next floor.
  • You have 30 seconds!
  • You wont get a second chance!

24
250-Word Summary
  • Summarize deal in one e-mail screen
  • Company Name and Location
  • Product Space Description
  • Key People
  • Description of the entire business idea in as few
    words as possible
  • Capital Requirements

25
Present Your Idea in 12 Slides!
3
Problem buy-in
Speaker intro
Market and opportunitysize
What youare after
with benefits
Mission stmt
6
8
7
Marketing and leverage points
Technologies
Competition
Call-to-action
How much?
Use of funds
26
Business Plan Components
  • Executive Summary
  • Customer Need and Business Opportunity
  • Business Strategy and Key Milestones
  • Marketing Plan
  • Operations Plan
  • Management and Key Personnel
  • Financial Projections

27
Business Plan Details
  • Executive Summary
  • Business opportunity, business model, addressable
    market, product/service description, technology
    and management team
  • Market Validation Have real customers paid real
    dollars because the perceive real value?
  • What Can Go Right and What Can Go Wrong?
  • Summary of five-year income statement, profit,
    head count and capital requirements

28
BP Details, continued
  • Customer Need and Business Opportunity
  • Product/service idea and technology description
  • Strategic Value Triangle for end users and
    customers
  • Business Strategy and Key Milestones
  • Plan to out-maneuver the competition
  • Show each milestone with the cumulative cash
    needed and head count

29
BP Details, continued
  • Marketing Plan
  • Basic need and company solution
  • Ideal customer and value proposition
  • Market segmentation and size of markets
  • Channels of Distribution
  • Strategic Partners

30
BP Details, cont.
  • Marketing Plan, cont.
  • Business model and branding plan
  • Sales strategy and plans
  • Customer support
  • Five-year sales forecast
  • Competition, positioning and unfair advantage
    (proprietary position)

31
BP Details, continued
  • Operations Plan
  • Engineering plan
  • Web site plan
  • Manufacturing or outsourcing plan (Make/Buy)
  • Facilities and administration plan
  • Management and Key Personnel
  • Organization Chart
  • Staffing plan (timing) and head count projections
  • Detailed resumes of founders and key employees
  • Are management and employees aligned with success
    of the company?
  • An A management team with a B product is
    superior to a B management team with an A
    product

32
BP Details, continued
  • Financial Projections
  • Overview and key assumptions
  • Best, Worst and Expected Case Versions
  • Five-year forecasts Balance sheet, Income
    statement and Cash Flow Stmt by month for one
    year, by quarter for two years and annually for
    remainder of years.

33
BP Details, continued
  • Historical Income Statements
  • Historical Balance Sheets
  • Historical Cash Flow Statements
  • Valuation Analysis
  • Exit Options
  • Return on Investment for each option

34
Summary
  • A good storyteller (entrepreneur) is an
    evangelist and is passionate about their idea.
  • Have they validated their idea or concept with
    real, paying customers?
  • Have they aligned all the parties in the value
    chain
  • Have they formed the key management group? How do
    they plan to retain them? What company culture
    have they created?
  • How well do they know the industry and the
    competitors?
  • Re-planning As the economy, the industry and
    the competition changes, how well has the
    management team responded to these conditions?
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