Entrepreneurship and Effective Small Business Management 11e by

Chapter 8 New Business Planning Process: Feasibility Analysis, Business Modeling, and Crafting a Winning

New Business Planning ØThe easiest part of launching a new business is coming up with the idea ØBut, the great idea is just the start ØPlanning for a new business requires: 1. Feasibility analysis: should we proceed with this idea? 2. Business model: how should we proceed with this idea? 3. Business plan: transforming the idea into a successful business Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -3

New Business Planning Process Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

Conducting a Feasibility Analysis ØA feasibility analysis consists of four interrelated components: 1. An industry and market feasibility analysis 2. A product or service feasibility analysis 3. A financial feasibility analysis 4. An entrepreneur feasibility analysis Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -5

Conducting a Feasibility Analysis Elements of a Feasibility Analysis Copyright © 2015 Pearson Education,

Conducting a Feasibility Analysis ØIndustry and Market Feasibility Analysis ØTwo areas of focus: 1. Determining how attractive an industry is overall as a “home” for a new business 2. Identifying possible niches a small business can occupy profitably Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -7

Conducting a Feasibility Analysis ØBegin with a broad look at the industry ØUse Porter’s five forces model Ø Five forces interact with one another to determine the setting in which companies compete and, hence, the attractiveness of the industry: 1. Rivalry among competing firms 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of new entrants 5. Threat of substitute products or services Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -8

Conducting a Feasibility Analysis Porter’s Five Forces Model Copyright © 2015 Pearson Education, Inc.

Conducting a Feasibility Analysis 1. Rivalry among companies competing in the industry ØStrongest of the five forces ØIndustry is more attractive when: ØNumber of competitors is large, or, at the other extreme, quite small ØCompetitors are not similar in size or capacity ØIndustry is growing fast ØOpportunity to sell a differentiated product or service exists Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -10

Conducting a Feasibility Analysis 2. Bargaining power of suppliers to the industry Ø The greater the leverage of suppliers, the less attractive the industry Ø Industry is more attractive when: Ø Many suppliers sell a commodity product Ø Substitutes are available Ø Switching costs are low Ø Items account for a small portion of the cost of finished products Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -11

Conducting a Feasibility Analysis 3. Bargaining power of buyers Ø Highest when the number of customers is small and cost of switching to a competitor’s product is low Ø Industry is more attractive when: Ø Customers’ switching costs are high Ø Number of buyers is large Ø Customers want differentiated products Ø Customers find it difficult to collect information for comparing suppliers Ø Items account for a small portion of customers’ finished products Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -12

Conducting a Feasibility Analysis 4. Threat of new entrants to the industry ØThe larger the pool of potential new entrants, the less attractive the industry ØIndustry is more attractive to new entrants when: ØAdvantages of economies of scale are absent ØCapital requirements to enter are low ØCost advantages are not related to company size ØBuyers are not loyal to existing brands ØGovernment does not restrict the entrance of new companies Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -13

Conducting a Feasibility Analysis 5. Threat of substitute products or services Ø Substitute products or services can turn an industry on its head Ø Industry is more attractive to new entrants when: Ø Quality substitutes are not readily available Ø Prices of substitute products are not significantly lower than those of the industry’s products Ø Buyers’ switching costs are high Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -14

Conducting a Feasibility Analysis Five Forces Matrix Copyright © 2015 Pearson Education, Inc. publishing

Conducting a Feasibility Analysis ØA niche strategy can be a good way to enter a market, but carries some risks: ØCan require adaptability of initial plans ØNiches change ØNiches can go away ØNiches can grow Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -16

Conducting a Feasibility Analysis ØA feasibility analysis consists of four interrelated components: 1. An industry and market feasibility analysis ØA product or service feasibility analysis Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -17

Conducting a Feasibility Analysis 2. Product or Service Feasibility Analysis: Is There a Market? ØDetermines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce it ØTwo questions: ØAre customers willing to purchase our good or service? ØCan we provide the product or service to customers at a profit? Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -18

Conducting a Feasibility Analysis ØPrimary research: collect data firsthand analyze it ØCustomer surveys and questionnaires ØFocus groups ØPrototypes ØIn-home trials Ø“Windshield” research Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -19

Conducting a Feasibility Analysis ØSecondary research: gather data that already has been compiled analyze it ØTrade associations and business directories ØIndustry databases ØDemographic data ØForecasts ØMarket research ØArticles ØLocal data ØThe Internet Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -20

Conducting a Feasibility Analysis ØA feasibility analysis consists of four interrelated components: 1. An industry and market feasibility analysis 2. A product or service feasibility analysis ØA financial feasibility analysis Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -21

Conducting a Feasibility Analysis 3. Financial Feasibility Analysis: Is There Enough Margin? ØCapital requirements ØMust have an estimate of how much start-up capital is required to launch the business ØBootstrapping ØEstimated earnings ØForecasted income statements ØTime out of cash ØSurviving at current rate of negative cash flow ØReturn on investment: ØHow much investors can expect their investments to return Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -22

Conducting a Feasibility Analysis ØA feasibility analysis consists of four interrelated components: 1. An industry and market feasibility analysis 2. A product or service feasibility analysis 3. A financial feasibility analysis ØAn entrepreneur feasibility analysis Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -23

Conducting a Feasibility Analysis 4. Entrepreneur Feasibility: Is This Idea Right for Me? ØEntrepreneurial readiness: knowledge, experiences, and skills necessary to have any chance of being successful Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -24

Developing and Testing a Business Model ØMost entrepreneurs use a visual process such as whiteboarding when developing their business models ØDevelop a business model canvas comprised of nine segments Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -25

Developing and Testing a Business Model Canvas Copyright © 2015 Pearson Education, Inc. publishing

Developing and Testing a Business Model 1. Value Proposition ØProducts and/or services offered to meet the needs of the customers 2. Customer Segments ØNarrowing the target market focuses resources on serving a specific group of customers 3. Customer Relationships ØHow do customers want to interact with the business? Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -27

Developing and Testing a Business Model 4. Channels ØChannels refer to both communication channels and distribution channels ØDefine how the customers seek out information about this type of product 5. Key Activities ØBuild a basic checklist of what needs to be done 6. Key resources Ø Human, capital, and intellectual resources needed Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -28

Developing and Testing a Business Model 7. Key partners Ø Suppliers, outsourcing partners, and so on 8. Revenue streams Ø How will the value proposition generate revenue? 9. Cost structure Ø What are the fixed and variable costs necessary? Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -29

Developing and Testing a Business Model ØDeveloping a business model is a four phase process: 1. Create an initial business model canvas 2. Test the problem that the entrepreneur thinks the business solves for the customer 3. Test the business model in the market ØBusiness prototyping ØLean start-up ØMinimum viable product 4. Make changes and adjustments in the business pivots Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -30

The Benefits of Creating a Business Plan ØBusiness plan: a written summary of an entrepreneur’s proposed business venture, its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities ØServes two functions: 1. Guides the company’s growth and development 2. Attracts lenders and investors Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -31

Three Tests That Every Business Plan Must Pass ØTo get external financing, an entrepreneur needs to pass three tests: 1. Reality test 2. Competitive test 3. Value test Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -32

The Elements of a Business Plan Ø Common elements of a business plan ØTitle page and table of contents ØExecutive summary ØMission statement ØCompany history ØBusiness and industry profile ØBusiness strategy ØDescription of products/services ØBusiness and industry profile ØGoals and objectives Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -33

The Elements of a Business Plan ØBusiness strategy ØCompetitor analysis ØMarketing strategy ØShowing customer interest ØDocumenting market claims ØTarget market ØAdvertising and promotion ØMarket size and trends ØLocation ØPricing ØDistribution Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -34

The Elements of a Business Plan ØDescription of the management team ØPlan of operation ØPro forma (projected) financial statements ØForecasts should be realistic ØInclude a statement of assumptions ØThe loan or investment proposal ØFunding sources ØRepayment schedule ØImplementation timetable Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -35

The Elements of a Business Plan Visualizing a Venture’s Risks and Rewards Copyright ©

The Elements of a Business Plan ØVisualizing a Venture’s Risks and Rewards ØA working business plan is used to guide the entrepreneur ØA presentation business plan is used to attract capital Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -37

The Elements of a Business Plan ØAn entrepreneur should: ØMake sure the plan has an attractive cover ØRid your plan of all spelling and grammatical errors ØMake the plan visually appealing ØInclude a table of contents to allow readers to navigate the plan easily ØMake it interesting! ØUse spreadsheets to generate financial forecasts ØAlways include cash flow projections ØKeep your plan “crisp” – long enough, but not too long ØTell the truth – always Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -38

What Lenders and Investors Look for in a Business Plan ØThe five Cs of credit: 1. Capital 2. Capacity 3. Collateral 4. Character 5. Conditions Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -39

The Pitch: Making the Business Plan Presentation ØA business plan presentation should cover five basic areas: 1. Your company and its product or services 2. The problem to be solved – use a compelling story 3. A description of your solution to the problem 4. Your company’s business model 5. Your company’s competitive edge Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -40

The Pitch: Making the Business Plan Presentation ØA business plan presentation should cover five basic areas: 1. Your company and its product or services 2. The problem to be solved – use a compelling story 3. A description of your solution to the problem 4. Your company’s business model 5. Your company’s competitive edge Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -41

The Pitch: Making the Business Plan Presentation ØWhen making the presentation: 1. Prepare 2. Practice your delivery and then practice some more 3. Demonstrate enthusiasm about the business but don’t be overemotional 4. Focus on communicating the dynamic opportunity your idea offers and how you plan to capitalize on it 5. Hook investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -42

The Pitch: Making the Business Plan Presentation 6. Use visual aids 7. Follow Guy Kawasaki’s 10/20/30 rule for Power. Point presentations 8. Explain how your company’s products or services solve some problem and emphasize the factors that make your company unique 9. Offer proof 10. Hit the highlights 11. Keep the presentation “crisp” just like your business plan Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -43

The Pitch: Making the Business Plan Presentation 12. Avoid the use of technical terms 13. Remember to answer the question “What’s in it for me? ” 14. Close by reinforcing the potential of the opportunity 15. Be prepared for questions 16. Anticipate the questions the audience is most likely to ask and prepare for them in advance 17. Be sensitive to the issues that are most important to lenders and investors by reading the pattern of their questions 18. Follow up with each potential investor Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8 -44