Transcript ETP 6500 Week 4 slides Business Planning

Business Planning
Dr. Mark T. Schenkel
Belmont University
To Plan or Not To Plan . . . ?
Pros
– Illuminates & clarifies the
value proposition
– Facilitates resource
acquisition & credibility in
the marketplace
– Creates common
“cognitive infrastructure”
among key internal
people that allows for
synergistic efforts to
develop
Cons
– Irrelevant
– Can lead to dysfunction
– Researchability often
inversely associated
with financial
attractiveness (Bhide)
– Traditional tools (e.g.,
discounted cash flow
analysis) difficult to
employ with confidence
(i.e., lack of cash flow
predictability, impact of
small assumption
changes) (Bhide)
Reasons For Plan Failure
1.
Unreasonable Goals
2.
Goals Not Measurable
3.
No Total Commitment
4.
Lack Of Experience
5.
No Understanding Of Threats Or
Weaknesses
6.
Customer Need Not Established
7.
Underemphasis on market & investors in
favor of producer as constituency
To Plan or Not To Plan . . . ? Is
This Really the “Right” Question?
The evidence suggests no . . . How planning is
conducted is a far more important question than
if . . . focus should be on the role of planning.
– Key issues: information and implementation
– Implication: quickly screening out losers
• Is an idea worth researching (e.g., does it meet or
exceed the entrepreneur’s income requirements; low
capital requirements; high margins for error; options
for cashing in; sustainability of business model)?
– Example: Levi Strauss
» Creativity & “Me” needs
» Capacity for execution
» Competition . . . Implications for sustainability
A Basic Conceptual Framework
Venture
Industry
Environment
Goals &
Values
Resources &
Capabilities
Structure &
Systems
STRATEGY
STRATEGY
Competitors
Customers
Suppliers
Discovery-Driven Planning Approach
A process for systematically
unearthing the implicit, and
potentially dangerous assumptions
and testing them in a series of
“experiements” before freezing a
strategy that may prove to be fatally
flawed.
-- McGrath & MacMillan
Common Platform-Based Planning Errors
• Proceeding as though assumptions are “fact”
even in the absence of hard data (e.g., Euro
Disney admission pricing)
• Have data, but fail to see implications (e.g., UPS
– need for overnight delivery)
• Have data, but make implicit or inappropriate
assumptions on ability to implement (i.e., form of
overconfidence) (e.g., Estes – labor market)
• Start off with right data, but implicitly assume
static environment and thus fail to notice key
variable shifts
Discovery-Driven Planning Approach
• Core premises . . .
– Degree of absolute risk can be offset with “proper”
planning and control tools
– Future results cannot be extrapolated from wellunderstood and predictable platforms of past experience
(i.e., knowledge); rather, the process inherently relies
upon assumptions
In short, the core premise of DDP is to build a reasonable
model of the economics and logistics of the venture and
assess the order and magnitude of the challenges,
rather than attaining perfection in terms of plan accuracy
(i.e., the platform-based approach).
Discovery-Driven Planning Approach
• Plan alone is neither necessary nor sufficient!!!
• Emphasis is on integrating analysis and action
(McGrath & MacMillan); “systematically thinking
about how the risk reward ratio can be managed
(Sahlman)
– Staging analytical tasks just enough to justify next
action
– Plugging holes quickly to minimize risk
• E.g., people, opportunity, external context, deal (Sahlman)
– dynamic / multidimensionality is key!!!
– “Evangelical” investigation (i.e., gaining sense of, and
commitment where possible on future sales)
– Flexible perseverance (willingness to shape core
strategic approach as necessary)
Discovery-Driven Planning
• Key Question from the Business
Plan: What do you need from your
business?
– Reverse Income Statement
Aspirations: income and wealth
Target profits to reach income and wealth
Estimate required sales
Calculate unit sales
I
O
Discovery-Driven Planning
• Operating Specs
Sales and COGS activities
Operations
Distribution
Equipment
Discovery-Driven Planning
• Track assumptions
List all assumptions used in
planning
Identify measures of assumptions
Create assumption list to test
progress
Gather data to track assumptions
Discovery-Driven Planning
• Test assumptions
Based on time
Based on sales growth
Based on other key events
Allows for adjustments on “the fly”
Keeps focus on key issues
Types and Uses of
Business Plans
• Internal
• Debt financing
• Equity financing
Business Plan: Internal Use
• Blue print for the business
• Organizes key issues
• Serves as “check list”
• Includes detailed marketing,
financing, and operating sections
Business Plan: Debt Financing
• Used for bank loans, landlords, and
vendors
• Built from internal plan
• Narrative sections of the plan are
summarized and condensed
• Financial sections in full detail
• Clear financing plan included: equity &
debt
Business Plan: Equity
Financing
• Built from internal plan
• Only operating plan is condensed
• Financial and marketing plans in full
detail
• Expanded industry discussion
• Clear financing plan included: debt &
equity
Key Plan Components
• Mission Statement
– Should identify stakeholders, values, competitive
advantage, competitive market, product / service
• The Marketing Plan
– Know your customers!!!
 Think like your customers
 Identify a clear target market
– Know your competitors
 Inventory all competitors
 Inventory customer needs
 Create a competitive grid and/or strategic group map
– Know your marketing strategy (4-P’s)
Key Plan Components
• Financial Plan
–
–
–
–
Income statements
Balance sheets
Statements of cash flows (Direct method)
Break-even analysis
• Operating Plan
– Map out flow of business
– Mgt Team, Advisors, & Staff
– Don’t forget space plan and costs!!!
Using the Business Plan
• Gives last chance to fail on paper
• Used in financing
• Used to establish supplier and
customer relationships
• Used to recruit key employees
• Used to build commitment among
team members
• Creates consistent blueprint
• Keeps focus during growth
Updating the Plan
• Significant changes:
Business model
Market
Key assumptions
• Additional financing
• Sale of business
• Continuous team building and
re-energizing commitment
Some Planning Do’s and Don’ts
Do’s
•
•
•
•
•
•
Involve entire management team
Short, logical, comprehensive, and readable
Articulate critical risks, assumptions and why tolerable
Disclose and discuss current or potential problems
Be creative, but spell out how the investors will win
Let realistic market and sales projections drive the
assumptions underlying financials, rather than reverse
Don’ts
• Unnamed, mysterious people on the management team
• Make ambiguous, vague, or unsubstantiated statements
(e.g., estimating sales on what you would like to produce)
• Using jargon – limits the plans usefulness
• Spend money on “sizzle,” (e.g., fancy brochure
development) instead, show the “beef”
Key Takeaway Points . . .
• Analysis and critical thinking are the
beginnings and ongoing foundation of
good business planning.
• Business plans should be comprehensive,
yet facilitate an ease of understanding for
participating members and investors in the
venture so as to promote action!
• If a stakeholder is unclear on a point in the
plan, then you have missed something . . .
redouble your efforts accordingly.