Conducting a Feasibility Analysis and �Crafting a Winning �Business Plan chapter 04

business education

1. Copyright 2008 Prentice Hall Publishing 1Chapter 4 Business Plan
Conducting a Feasibility
Analysis and
Crafting a Winning
Business Plan

2. Copyright 2008 Prentice Hall Publishing 2Chapter 4 Business Plan
Feasibility AnalysisFeasibility Analysis

Entrepreneurs do not lack creative Entrepreneurs do not lack creative
ideas,ideas,
but…but…

Is a particular idea a viable foundation Is a particular idea a viable foundation
for creating a successful business? for creating a successful business?

Feasibility study addresses the Feasibility study addresses the
question: “Should we proceed with this question: “Should we proceed with this
business idea?”business idea?”

3. Copyright 2008 Prentice Hall Publishing 3Chapter 4 Business Plan
Feasibility StudyFeasibility Study

NotNot the same as a business plan. the same as a business plan.

Serves as a filter, screening out ideas Serves as a filter, screening out ideas
that lack the potential for building a that lack the potential for building a
successful business successful business beforebefore an an
entrepreneur commits the necessary entrepreneur commits the necessary
resources to building a business plan. resources to building a business plan.

An investigative tool.An investigative tool.

4. Copyright 2008 Prentice Hall Publishing 4Chapter 4 Business Plan
Industry and Industry and
Market FeasibilityMarket Feasibility
Product or ServiceProduct or Service
FeasibilityFeasibility
FinancialFinancial
FeasibilityFeasibility
Elements of a Feasibility AnalysisElements of a Feasibility Analysis

5. Copyright 2008 Prentice Hall Publishing 5Chapter 4 Business Plan
Industry and
Market Feasibility
Product or ServiceProduct or Service
FeasibilityFeasibility
FinancialFinancial
FeasibilityFeasibility
Elements of a Feasibility AnalysisElements of a Feasibility Analysis

6. Copyright 2008 Prentice Hall Publishing 6Chapter 4 Business Plan
Industry and Market Industry and Market
Feasibility AnalysisFeasibility Analysis
Two areas of focus:Two areas of focus:
1.1.Determining how attractive an Determining how attractive an
industry is overall as a “home” for a industry is overall as a “home” for a
new business.new business.
2.2.Identifying possible niches a small Identifying possible niches a small
business can occupy profitably. business can occupy profitably.

7. Copyright 2008 Prentice Hall Publishing 7Chapter 4 Business Plan
Five Forces ModelFive Forces Model

Five forces interact with one another to Five forces interact with one another to
determine the setting in which determine the setting in which
companies compete and, hence, the companies compete and, hence, the
attractiveness of the industry:attractiveness of the industry:
1.1.Rivalry among companies in the industryRivalry among companies in the industry
2.2.Bargaining power of suppliersBargaining power of suppliers
3.3.Bargaining power of buyersBargaining power of buyers
4.4.Threat of new entrantsThreat of new entrants
5.5.Threat of substitute products or servicesThreat of substitute products or services

8. Copyright 2008 Prentice Hall Publishing 8Chapter 4 Business Plan
Five Forces ModelFive Forces Model
Industry
Competitors
Rivalry
Among
Existing
Firms
Buyers
Bargaining PowerBargaining Power
of Buyersof Buyers
Suppliers
Bargaining PowerBargaining Power
of Suppliersof Suppliers
Substitutes
Potential
Entrants
Threat ofThreat of
New EntrantsNew Entrants
Threat of SubstituteThreat of Substitute
Products or Products or
ServicesServices

9. Copyright 2008 Prentice Hall Publishing 9Chapter 4 Business Plan
Five Forces ModelFive Forces Model
Industry
Competitors
Rivalry
Among
Existing
Firms
Buyers
Bargaining PowerBargaining Power
of Buyersof Buyers
Suppliers
Bargaining PowerBargaining Power
of Suppliersof Suppliers
Substitutes
Potential
Entrants
Threat ofThreat of
New EntrantsNew Entrants
Threat of SubstituteThreat of Substitute
Products or Products or
ServicesServices

10. Copyright 2008 Prentice Hall Publishing 10Chapter 4 Business Plan
Rivalry Among CompaniesRivalry Among Companies

Strongest of the five forcesStrongest of the five forces

Industry is more attractive when:Industry is more attractive when:

Number of competitors is large, or, at Number of competitors is large, or, at
the other extreme, quite smallthe other extreme, quite small

Competitors are not similar in size or Competitors are not similar in size or
capacitycapacity

Industry is growing fastIndustry is growing fast

Opportunity to sell a differentiated Opportunity to sell a differentiated
product or service existsproduct or service exists

11. Copyright 2008 Prentice Hall Publishing 11Chapter 4 Business Plan
Five Forces ModelFive Forces Model
Industry
Competitors
Rivalry
Among
Existing
Firms
Buyers
Bargaining PowerBargaining Power
of Buyersof Buyers
Suppliers
Bargaining PowerBargaining Power
of Suppliersof Suppliers
Substitutes
Potential
Entrants
Threat ofThreat of
New EntrantsNew Entrants
Threat of SubstituteThreat of Substitute
Products or Products or
ServicesServices

12. Copyright 2008 Prentice Hall Publishing 12Chapter 4 Business Plan
Bargaining Power of SuppliersBargaining Power of Suppliers

The greater the leverage of suppliers, The greater the leverage of suppliers,
the less attractive the industry.the less attractive the industry.

Industry is more attractive when:Industry is more attractive when:

Many suppliers sell a commodity Many suppliers sell a commodity
productproduct

Substitutes are availableSubstitutes are available

Switching costs are lowSwitching costs are low

Items account for a small portion of the Items account for a small portion of the
cost of finished productscost of finished products

13. Copyright 2008 Prentice Hall Publishing 13Chapter 4 Business Plan
Five Forces ModelFive Forces Model
Industry
Competitors
Rivalry
Among
Existing
Firms
Buyers
Bargaining PowerBargaining Power
of Buyersof Buyers
Suppliers
Bargaining PowerBargaining Power
of Suppliersof Suppliers
Substitutes
Potential
Entrants
Threat ofThreat of
New EntrantsNew Entrants
Threat of SubstituteThreat of Substitute
Products or Products or
ServicesServices

14. Copyright 2008 Prentice Hall Publishing 14Chapter 4 Business Plan
Bargaining Power of BuyersBargaining Power of Buyers

Buyers’ influence is high when number of Buyers’ influence is high when number of
customers is small and cost of switching to a customers is small and cost of switching to a
competitor’s product is low. competitor’s product is low.

Industry is more attractive when:Industry is more attractive when:

Customers’ switching costs are highCustomers’ switching costs are high

Number of buyers is largeNumber of buyers is large

Customers want differentiated productsCustomers want differentiated products

Customers find it difficult to collect information Customers find it difficult to collect information
for comparing suppliersfor comparing suppliers

Items account for a small portion of customers’ Items account for a small portion of customers’
finished productsfinished products

15. Copyright 2008 Prentice Hall Publishing 15Chapter 4 Business Plan
Five Forces ModelFive Forces Model
Industry
Competitors
Rivalry
Among
Existing
Firms
Buyers
Bargaining PowerBargaining Power
of Buyersof Buyers
Suppliers
Bargaining PowerBargaining Power
of Suppliersof Suppliers
Substitutes
Potential
Entrants
Threat ofThreat of
New EntrantsNew Entrants
Threat of SubstituteThreat of Substitute
Products or Products or
ServicesServices

16. Copyright 2008 Prentice Hall Publishing 16Chapter 4 Business Plan
Threat of New EntrantsThreat of New Entrants

The larger the pool of potential new entrants, The larger the pool of potential new entrants,
the less attractive an industry is.the less attractive an industry is.

Industry is more attractive to new entrants Industry is more attractive to new entrants
when:when:

Advantages of economies of scale are absent.Advantages of economies of scale are absent.

Capital requirements to enter are lowCapital requirements to enter are low

Cost advantages are not related to company sizeCost advantages are not related to company size

Buyers are not loyal to existing brandsBuyers are not loyal to existing brands

Government does not restrict the entrance of new Government does not restrict the entrance of new
companies companies

17. Copyright 2008 Prentice Hall Publishing 17Chapter 4 Business Plan
Five Forces ModelFive Forces Model
Industry
Competitors
Rivalry
Among
Existing
Firms
Buyers
Bargaining PowerBargaining Power
of Buyersof Buyers
Suppliers
Bargaining PowerBargaining Power
of Suppliersof Suppliers
Substitutes
Potential
Entrants
Threat ofThreat of
New EntrantsNew Entrants
Threat of SubstituteThreat of Substitute
Products or Products or
ServicesServices

18. Copyright 2008 Prentice Hall Publishing 18Chapter 4 Business Plan
Threat of SubstitutesThreat of Substitutes

Substitute products or services can turn Substitute products or services can turn
an industry on its head.an industry on its head.

Industry is more attractive to new Industry is more attractive to new
entrants when:entrants when:

Quality substitutes are not readily availableQuality substitutes are not readily available

Prices of substitute products are not Prices of substitute products are not
significantly lower than those of the significantly lower than those of the
industry’s productsindustry’s products

Buyers’ switching costs are highBuyers’ switching costs are high

19. Copyright 2008 Prentice Hall Publishing 19Chapter 4 Business Plan
Five Forces MatrixFive Forces Matrix

20. Copyright 2008 Prentice Hall Publishing 20Chapter 4 Business Plan
Business PrototypingBusiness Prototyping

Entrepreneurs test their business models Entrepreneurs test their business models
on a small scale before committing on a small scale before committing
serious resources to launch a business serious resources to launch a business
that might not work. that might not work.

Recognizes that a business idea is a Recognizes that a business idea is a
hypothesis that needs to be tested before hypothesis that needs to be tested before
taking it full scale. taking it full scale.

21. Copyright 2008 Prentice Hall Publishing 21Chapter 4 Business Plan
Industry and Industry and
Market FeasibilityMarket Feasibility
Product or Service
Feasibility
FinancialFinancial
FeasibilityFeasibility
Elements of a Feasibility AnalysisElements of a Feasibility Analysis

22. Copyright 2008 Prentice Hall Publishing 22Chapter 4 Business Plan
Product or Service Product or Service
Feasibility AnalysisFeasibility Analysis

Determines the degree to which a product or Determines the degree to which a product or
service idea appeals to potential customers service idea appeals to potential customers
and identifies the resources necessary to and identifies the resources necessary to
produce it. produce it.

Two questions:Two questions:

Are customers willing to purchase our good or Are customers willing to purchase our good or
service?service?

Can we provide the product or service to Can we provide the product or service to
customers at a profit? customers at a profit?

23. Copyright 2008 Prentice Hall Publishing 23Chapter 4 Business Plan
Product or Service Product or Service
Feasibility AnalysisFeasibility Analysis

Primary research – collect data firsthand and Primary research – collect data firsthand and
analyze it.analyze it.

Customer surveys and questionnairesCustomer surveys and questionnaires

Focus groupsFocus groups

Secondary research – gather data that already Secondary research – gather data that already
has been compiled and analyze it. has been compiled and analyze it.

PrototypesPrototypes

In-home trialsIn-home trials

24. Copyright 2008 Prentice Hall Publishing 24Chapter 4 Business Plan
Industry and Industry and
Market FeasibilityMarket Feasibility
Product or ServiceProduct or Service
FeasibilityFeasibility
Financial
Feasibility
Elements of a Feasibility AnalysisElements of a Feasibility Analysis

25. Copyright 2008 Prentice Hall Publishing 25Chapter 4 Business Plan
Financial Feasibility Financial Feasibility
AnalysisAnalysis

Capital requirements – must have an estimate of Capital requirements – must have an estimate of
how much start-up capital is required to launch the how much start-up capital is required to launch the
business.business.

Estimated earnings – forecasted income statements.Estimated earnings – forecasted income statements.

Return on investment – combining the previous two Return on investment – combining the previous two
estimates to determine how much investors can estimates to determine how much investors can
expect their investments to return. expect their investments to return.

26. Copyright 2008 Prentice Hall Publishing 26Chapter 4 Business Plan
The Business PlanThe Business Plan

A written summary of:A written summary of:

an entrepreneur’s proposed business venturean entrepreneur’s proposed business venture

its operational and financial detailsits operational and financial details

its marketing opportunities and strategyits marketing opportunities and strategy

its managers’ skills and abilities. its managers’ skills and abilities.

Best insurance against launching a business Best insurance against launching a business
destined to fail or mismanaging a potentially destined to fail or mismanaging a potentially
successful company. successful company.

27. Copyright 2008 Prentice Hall Publishing 27Chapter 4 Business Plan
The Business Plan:The Business Plan:
Three Essential FunctionsThree Essential Functions
1.1.Guiding the company by charting its future Guiding the company by charting its future
course and defining its strategy for following course and defining its strategy for following
it.it.
2.2.Attracting lenders and investors who will Attracting lenders and investors who will
provide needed capital.provide needed capital.
3.3.Demonstrating that the entrepreneur Demonstrating that the entrepreneur
understands the business venture and what understands the business venture and what
will make it succeed. will make it succeed.

28. Copyright 2008 Prentice Hall Publishing 28Chapter 4 Business Plan
A Plan Must Pass Three TestsA Plan Must Pass Three Tests

The Reality Test - The Reality Test - proving that :proving that :

a market really does exist for your product or service. a market really does exist for your product or service.

you can actually build or provide it for the cost estimates you can actually build or provide it for the cost estimates
in the plan.in the plan.

The Competitive Test The Competitive Test - evaluates: - evaluates:

a company’s position relative to its customers.a company’s position relative to its customers.

management’s ability to create a company that will gain management’s ability to create a company that will gain
an edge over its rivals.an edge over its rivals.

The Value Test The Value Test – proving that:– proving that:

a venture offers investors or lenders an attractive rate of a venture offers investors or lenders an attractive rate of
return or a high probability of repayment.return or a high probability of repayment.

29. Copyright 2008 Prentice Hall Publishing 29Chapter 4 Business Plan
Why Take the Time to Why Take the Time to
Build a Business Plan?Build a Business Plan?

Although building a plan does not Although building a plan does not
guarantee success, it does guarantee success, it does
increase your chances of increase your chances of
succeeding in business.succeeding in business.

A plan is like a road map that A plan is like a road map that
serves as a guide on a journey serves as a guide on a journey
through unfamiliar, harsh, and through unfamiliar, harsh, and
dangerous territory. Don’t dangerous territory. Don’t
attempt the trip without a map!attempt the trip without a map!

30. Copyright 2008 Prentice Hall Publishing 30Chapter 4 Business Plan
Key Elements of a Business PlanKey Elements of a Business Plan

Title Page and Table of ContentsTitle Page and Table of Contents

Executive SummaryExecutive Summary

Mission StatementMission Statement

Company HistoryCompany History

Business and Industry ProfileBusiness and Industry Profile

31. The relationship among mission, goals, and
objectives.
Mission
Goals
Objectives

32. Copyright 2008 Prentice Hall Publishing 32Chapter 4 Business Plan
Key Elements of a Business PlanKey Elements of a Business Plan

Title Page and Table of ContentsTitle Page and Table of Contents

Executive SummaryExecutive Summary

Mission StatementMission Statement

Company HistoryCompany History

Business and Industry ProfileBusiness and Industry Profile

Business StrategyBusiness Strategy

Description of Products/ServicesDescription of Products/Services

33. Copyright 2008 Prentice Hall Publishing 33Chapter 4 Business Plan
Features versus BenefitsFeatures versus Benefits

FeatureFeature – a descriptive fact about a product – a descriptive fact about a product
or service (“an ergonomically designed, or service (“an ergonomically designed,
more comfortable handle”).more comfortable handle”).

BenefitBenefit – what a customer gains from the – what a customer gains from the
product or service feature (“fewer problems product or service feature (“fewer problems
with carpal tunnel syndrome and increased with carpal tunnel syndrome and increased
productivity”). productivity”).

34. Copyright 2008 Prentice Hall Publishing 34Chapter 4 Business Plan
Key Elements of a Business PlanKey Elements of a Business Plan

Marketing StrategyMarketing Strategy

Competitor AnalysisCompetitor Analysis

Description of Management Description of Management
TeamTeam

Plan of OperationPlan of Operation

Forecasted Financial Forecasted Financial
StatementsStatements

Loan or Investment ProposalLoan or Investment Proposal
(continued)(continued)

35. Copyright 2008 Prentice Hall Publishing 35Chapter 4 Business Plan
Guidelines for PreparingGuidelines for Preparing
a Business Plana Business Plan

Remember: No one can create your plan Remember: No one can create your plan forfor you. you.

Potential lenders want to see financial Potential lenders want to see financial
projections, but they are more interested in the projections, but they are more interested in the
strategiesstrategies for reaching those projections. for reaching those projections.

Show how you plan to set your business apart Show how you plan to set your business apart
from competitors; don’t fall into the “me too” from competitors; don’t fall into the “me too”
trap.trap.

Identify your target market and offer evidence Identify your target market and offer evidence
that customers for your product or service exist. that customers for your product or service exist.

36. Copyright 2008 Prentice Hall Publishing 36Chapter 4 Business Plan
Tips on PreparingTips on Preparing
a Business Plana Business Plan

Make sure your plan has an attractive cover. Make sure your plan has an attractive cover.
(First impressions are crucial.)(First impressions are crucial.)

Rid your plan of all spelling and grammatical Rid your plan of all spelling and grammatical
errors. errors.

Make your plan visually appealing. Make your plan visually appealing.

Include a table of contents to allow readers to Include a table of contents to allow readers to
navigate your plan easily. navigate your plan easily.

Make it interesting. Make it interesting.
(Continued)(Continued)

37. Copyright 2008 Prentice Hall Publishing 37Chapter 4 Business Plan
Tips on PreparingTips on Preparing
a Business Plana Business Plan

Your plan must prove that the business will make Your plan must prove that the business will make
money (not necessarily immediately, but money (not necessarily immediately, but
eventually).eventually).

Use spreadsheets to generate financial forecasts.Use spreadsheets to generate financial forecasts.

AlwaysAlways include cash flow projections. include cash flow projections.

Keep your plan “crisp” – between 25 and 50 Keep your plan “crisp” – between 25 and 50
pages long.pages long.

Tell the truth – Tell the truth – alwaysalways. .
(Continued)(Continued)

38. Copyright 2008 Prentice Hall Publishing 38Chapter 4 Business Plan
The “Five Cs” of The “Five Cs” of
CreditCredit

CapitalCapital

CapacityCapacity

CollateralCollateral

CharacterCharacter

ConditionsConditions

39. Copyright 2008 Prentice Hall Publishing 39Chapter 4 Business Plan
Presenting the PlanPresenting the Plan

Demonstrate enthusiasm, but don’t be Demonstrate enthusiasm, but don’t be
overemotional.overemotional.

Know your audience thoroughly. Know your audience thoroughly.

““Hook” investors quickly with an up-front Hook” investors quickly with an up-front
explanation of the venture, its opportunities, and explanation of the venture, its opportunities, and
its benefits to them.its benefits to them.

Hit the highlights; focus on the details later.Hit the highlights; focus on the details later.

Keep your presentation simple – 2 or 3 major Keep your presentation simple – 2 or 3 major
points. points.

40. Copyright 2008 Prentice Hall Publishing 40Chapter 4 Business Plan
Presenting the PlanPresenting the Plan

Avoid overloading your audience with Avoid overloading your audience with
technological jargon.technological jargon.

Use visual aids.Use visual aids.

Close by reinforcing the nature of the Close by reinforcing the nature of the
opportunity. opportunity.

Be prepared (with details) for potential investors’ Be prepared (with details) for potential investors’
questions.questions.

Follow up with every investor to whom you make Follow up with every investor to whom you make
your presentation.your presentation.
(Continued)(Continued)