Business Planning

MASTER in STRATEGIC DESIGN

GENERAL OBJECTIVES AND CHARACTERISTICS OF A BUSINESS PLAN

A business plan is a document that is typically used to develop a business idea be it in its
START UP PHASE,

or to formally define and analyze

NEW BUSINESS STRATEGIES

for

an already existing company (i.e. to develop and launch a new products, services, or communication elements, enter into new unknown/niche markets, a potential jointventure or partnership with other firms or even competition etc) A business plan should be considered as a that must be continuously

DYNAMIC TOOL

updated in terms of its hypotheses, business conditions and previsions (economic, market, operative etc) and scope. More specifically, a business plan can be used: Internally by a companys management or start-up team to evaluate the business initiative, or; Externally by potential investors, (institutions, partners or other entities that may be interested in investing in the business initiative) that must evaluate the new business venture. A business plan can also be categorized according to different objectives: PLANNING OBJECTIVES Formally analyze the business initiative from a quantitative and qualitative business dimension; Allow to anticipate possible critical issues involved in the business initiatives development Allow to formally structure and plan the activities that need to be conducted in order to develop and maintain the business initiative Allow the identification of the necessary resources that are need in order to develop and maintain the business initiative.

 Allow to give an overall business evaluation of the initiative for either management or potential investors CONTROL/UNDERSTAND/LEARNING OBJECTIVES This objective is typically adopted when the business plan, as a tool, is used to evaluate a strategic decision of an existing company. In fact, using the business plan as a control mechanism for this strategic decision, it is possible to view it as an instrument that analyzes the changes and variances of its output, and can act as a learning tool that can support the decision making process. COMMUNICATION OBJECTIVES If the business plan is developed for a start-up operation, then it can be used as a communication tool for potential partners, investors, institutions and/or clients/suppliers. Instead, in the event that the business plan is developed to support a strategic decision of an existing company, the it can be used as a communication tool for internal/external investors, board of directors, management as well as institutions.

BUSINESS PLAN STRUCTURE

The typical structure of a business plan can be divided in the following chapters: 1. Table of contents 2. Abstract 3. General company description 4. Detailed description of the business idea/new venture/new product/service etc. 5. Strategic Plan 6. Marketing Plan 7. Operating Plan

8. Organization Plan 9. Financial structure related to the business idea 10.Economic/financial forecast/plan

TABLE OF CONTENTS
The general characteristics of a business plans table of contents should be: High degree of legibility (Structured on various hierarchical levels to facilitate reading), High degree of informative and coherent content Clear and concise

1. ABSTRACT
The structure of a typical business plan abstract should NOT exceed 2/4 pages, and must contain enough detail to allow a transversal reading of the business idea in a brief period of time. In particular, the abstract should clearly and concisely articulate: The business idea in terms of o The stakeholder needs that it will satisfy (i.e. stakeholder needs are those needs that may be explicit or latent in society, that may exist or may need to be created in order for the business idea to make sense and satisfy); o The product/service it intends to develop/offer; o Its users and its underlying market. The competencies/resources that are necessary for the development of the business idea. In fact, the reader of the business plan must be able to immediately understand how many existing AND potential resources are necessary for the development of the business idea in terms of:

o Human resources; o Licenses/patents; o Brands and other complementary assets. The business ideas financial-economic forecast/plan in terms of ROE, ROI, IRR, and revenue (better to illustrate these using tables and graphs); The objectives of the business plan (I.e. sell 20% of the companys shares over the next 5 years, increase sales by 30% in the next 5 years, or obtain a market share in Italy and become market leader by 2010). Aside from this aforementioned content, the main characteristics/levers that one must consider while structuring the abstract are The abstracts style and appeal: it must convince its reader of the strategic nature and attractiveness in 2/4 pages; Must emphasize the business ideas strengths and opportunities while downplaying its weaknesses and threats Must be authoritative in its information, data and analysis. In fact, it should convey a consolidated, accurate and reputable nature (I.e. data obtained from AC Neilsen, Istat, Global data etc., analyses conducted from reputable and qualified individuals etc.)

2. GENERAL COMPANY DESCRIPTION

This section of a business plan focuses on describing the characteristics and structure of the company/start-up that is involved in the development of the business idea at hand. The main objective therefore is to sufficiently describe the external and internal configuration of the company through the use of various positioning models such as Abells model, the BCG Matric, the GE Matric etc., and structural models such as Porters value chain so as to be able to communicate the companys: Competitive positioning (Abells model, BCG Matrix, GE Matrix). Whatever the tool used to communicate the competitive positioning of the company and its products/services, the fundamental characteristic is to identify how the company, (including its portfolio of products/services) are currently positioned on the market

Value chain configuration according to Porter. Here the central focus is to describe the companys macro value chain configuration/activities along the entire value chain emphasizing its strengths and weaknesses in each activity. (I.e. the strength of IKEAs distributive and sales activities is key to the current positioning of the company).

 Current vision, mission, creed and objectives in terms of its current strategic plan. (I.e. cost leadership position on the market, ) Entrepreneurial composition. In particular, the general company description should evidence the following aspects: o Past successes/experiences o Competencies (explicit, tacit etc) o The companys strengths and ability to innovate These factors should be considered and emphasized in this section of the business plan if they are strengths and offer potential advantages for the development of the business idea that the next section will describe.

3. PRODUCT SYSTEM DESCRIPTION

1 Detailed description of the product system and how it functions from the various stakeholder perspectives: The objective is to clearly describe the concept and its resulting product system in detail so that the person reading the business plan (Upper management, Board of Directors, entrepreneur, manager, investor, bank etc.). As the objective is to clearly describe and explain the merits and advantages for the development of the business idea from a product system perspective, it is fundamental to articulate this part of the business plan in a convincing and original manner in order to attract the reader. Consequently, it is paramount to support the business initiative with the documents, diagrams, flow charts, analyses and other types of information that can convince the reader. (I.e. prototypes, mock ups etc.) 2 3 In this section, it is also paramount to distinguish the product system/business initiative from the existing product offers on the market. This, for two reasons: (1) to illustrate that the team has enough knowledge of the context, the stakeholder needs, and the current business offering, and what the future has in store for the product system. (2) To illustrate how the product system differentiates itself from the rest of the products/services on the market. Consequently, it is important to benchmark that various critical factors of the business idea with the current business offerings and clearly demonstrate the strengths and weaknesses of the proposed business initiative. Potential selling points could be: Quality of the product/services Conformity of the products Efficiency (delivery timing etc) Service level Range of products/services rendered

 Brand equity/image Price (related to the cost structure needed to offer the product/service Potential future technological developments Development of standards or other dominant characteristics of the product/service

4- STRATEGIC PLAN
4 Objective/ Mission of the company/initiative/product system 5 Internal analysis the objective of the strategic plan is to identify and analyze the strengths and weaknesses of the product system. There are many different methods and tools that can be used, but the most utilized are: Value chain analysis Through the use of the Porters value chain analysis, the company is broken down into a series of processes that can be subsequently analyzed in terms of strengths and weaknesses. For example, some possible strengths and weaknesses could be associated with different types of primary or secondary activities such as: Marketing: in terms of brand image, market share, perceived quality of the products/services offered, distribution costs, geographic reach of the company etc. Production: in terms of machinery and factories, economies of scale and scope, production capacity, specialized work force, speed of delivery etc. Organizational: in terms of leadership abilities, intuition, motivation, and other organizational variables. Resources/Competencies that could be a source of sustainable competitive advantages such as: Imitability Substitutability Appropriability Durable Competitive superiority

External analysis: The first thing to do in terms of an external analysis is to chose a reference point (more specifically, this could be a reference industry, sector, or business). Once accomplished, one typically begins by: Analyzing the attractivity of the sector (i.e. average long term returns for the chosen reference industry/sector etc). More often than not, companies typically only look at their direct competitors in order to understand the attractiveness of the sector. This, however, is a very limited view that can lead to misconceptions/misleading activites. To have a more complete view of the attractivity of the, one can use Porters 5 forces model illustrated below.

In particular, using this type of model, we can better comprehend the potential sources of competitive advantage for each of the forces under examination: Substitute products: A typical example of a substitute product is the example of the anti-theft alarm systems (burglar alarms) and vigilance services. Physically the two products are completely different, but, since the evidently satisfy the same needs, it is necessary to define the performance levels of each and evaluate their substitutability in terms of market acceptance, share, value etc. Potential entrants: the threat of potential entrants is indirectly proportional to the number of entry barriers that exist that can block the entry of potential new

competitors. Some potential entry barriers could be the present due to economies of scale/scope, brand equity, financial investments, the existence of complementary assets (i.e. distribution channels), the existence of standars or dominant designs etc. Direct competitors: this type of threat is very much conditioned by the number of companies that are present in the industry/sector and by the similarity of the types of products offered by the companies. In fact, the larger the number of companies and the more standardized the type of product, the more we reach the state of perfect competition in which the price of a product coincides with its production cost. Suppliers/clients: the reasons for a greater bargaining power on behalf of suppliers/clients are mainly due to: The degree of concentration of a sector/industry. (I.e. if we look at the automotive industry, and in particular, to the automotive component suppliers Vs the Automobile producers, given that the number of automotive producers are much less than the number of automotive component suppliers, the former are able to take advantage of their bargaining power in order to get the lowest prices possible for their components. The type of purchased product: I.e. the bargaining power of a producer of carburetors is higher than the producer of the interior wooden panels of an automobile since the first is a more important determinant of the overall perceived quality of the finished product); The cost percentage of the component with respect to the overall cost of the product. I.e.. A producer is able to negotiate better prices of products that account for 90% of the total cost of a finished product than that of a component that accounts for ony 10%; The standardability of a product (I.e. the bargaining power of a producer of a standardized product that can be adapted to different types of other products is

higher than that of a producer of a product that has a unique interface that is limited in its applicability or adaptability. The degree of knowledge that the producer has of your cost structure. In fact, the more transparent a cost structure, the less bargaining power one has over its suppliers or clients. The analysis of exogenous or external variables that may impact the initiative/company. For example, a useful analysis is the PEST analysis in which one tries to understand the Political, Economic, Social and Technolgoical contexts in which the initiative/business idea/product or company will operate. The chosen strategic direction: is the final result of a normal strategic plan of a business plan, which will be better described and interpreted through the other parts of the business plan. In particular, the parts of the business plan that will describe in more detail the chosen strategic direction are the Marketing and Operational plans. Possible strategic directions are cost leadership, differentiation and focalization (defined by Porter). Cost leadership: the objective of this strategy is to minimize the costs of production and distribution in order to be able to offer the lowest possible prices to ones target audience. To adopt this type of strategy, a company needs to focuse on the ability to design, purchase, internalize competencies, produce and distribute its products/services in the most efficient manner possible taking advantage of possible economies of scale and scope that can result from the day to day operations of a company. Less important to this type of strategy is the marketing strategies of a company. (I.e. Texas Instruments is a prime example of a company that took most advantage of their cost leadership position in the market) Differentiation: the main objective of this strategy is to create a product lineup and a marketing plan that is able to differentiate the explicit and intricate values of the products that the company offers so as to be able to be perceived by the target

audience as industry leaders. The distinctive abilities to implement such a strategy are R&D and design investments, quality control and marketing (Ex. IBM, Caterpillar) Focolization: With this strategy the company focuses its operations on only a few segments of the market. Of particular importance to these companies is the ability to understand the explicit and latent needs of their niche market and develop the competencies to design, develop, market and distribute their products accordingly, (Ex. Ferrari, Ducati)

5. MARKETING PLAN
In defining a marketing plan for the developed business idea and strategic direction, one has to: 1. Analyze and evaluate the potential markets by identifying, quantifying and evaluating the target segments of the business idea. 2. Define the marketing strategies (definition of the various marketing levers that can be used Marketing Mix Product, price, place, promotion) 3. Forecast the market demand in order to understand the dynamics of the chosen target segment so as to be able to measure how much of it the company that will be developing and offering the product/service will be able to satisfy. This is an extremely important to measure given that this data can have enormous impacts on the accuracy and precision of the business plan.

5.1 Analysis and evaluation of the potential market: To analyze and evaluate a potential business ideas market, one has to: Understand and evaluate the reference market of the business idea from a current market situation as well as from a market trend perspective (market opportunities). This market analysis is in fact fundamental data/information for: Finance (defining the present and future cash flows necessary for the investments that can be made); Production (defining the productive capacity needed to satisfy the evaluated market); Procurement (determining the type and quantity of raw material needed to satisfy the production requirements etc.); Personnel (defining the amount of work needed to be done, and therefore also the number and type of people/professionals needed to transform the business

idea into reality. SEGMENT THE MARKET Market segments are homogenous groups of people that are part of a particular potential market. Consequently, it is paramount to define different segments of the potential market that the business idea will try and satisfy in order to be able to define the quantity, quality and timing of the marketing plan in order to take full advantage of their communication, promotional and selling tasks. The more traditional types of segmentation strategies are: Geographic: one can distinguish between nations, regions, provinces etc. (I.e. Maxwell House coffee produced by General Food that is commercialized throughout the United States with different types of coffee blends depending on the coastal desitination) Demographic: with this type of segmentation we look at the typical demographic variables such as age, sex, family nucleus dimension, life-cycle, occupation, social status, salary etc. This type of segmentation is among the most commonly used due to its easily measurable nature and the fact that needs, preferences and habits are relatively closely correlated to these factors. (Ex. Play Skool that organizes different product lines depending on age, the Ford Mustang, which was originally targeted to young people, but that was seen as a car that cut different segments freely etc.) Behavioral/psychographic: this type of segmentation is based on the idea that geographics and demographics are not the only manner in which people can be distinguished. Segmentation can also be achieved by looking at peoples behavior, lifestyles and mindstyles. However, irregardless of the manner in which ones decides to segment a market, the results should have the following characteristics: Measurable;

 Accessible: in terms of how a company is able to access the determined segment; Importance: the amplitude and depth of the identified segments must be able to guarantee profitability to the company; Practicability: the company must be able to define and implement marketing efforts that can target the defined segments. MARKET QUANTIFICATION To quantify a market, the necessary information can be obtained by: Consulting/Service companies. The main problem related to this type of scenario is the cost associated with gathering the data related to the defined market segmentation, which is directly proportional to the degree of specialization of the consulting company, and the type of services that they can offer (standardized, customized or personalized market quantification etc) Direct observation or experience of the company or entrepreneur developing the business, which he/she can obtain through: Interviews conducted to the end-users or through points of sale. The main problem with this type of method is the time and mony that this type of analysis takes to obtain accurate and precise information of the segment. By analogy: through the evaluation of similar products in the same market, or products in other countries. The main problem with this method is when no analogous product exists (ex. Products that may be similar but that are not distributed through the same channels, or do not have the same price etc.)

Influencing factors such as the demographic evolution of the market or other

social factors.

5.2 MARKETING STRATEGY

The reference model for the definition of a marketing strategy is typically Kotlers marketing mix (4Ps_Product, Price, Place and Promotion) or a derivative of this model. The main objective of this part of the business plan is to elaborate a coherent marketing strategy in which the above mentioned variables are coherently articulated amongst themselves and with the identified and quantified market segments. Product: For the most part, this variable of the marketing mix has already been defined in the Description of the Product System chapter of the business plan. However, as a variable of the marketing mix, there may be a few aspects that may need to be more clearly defined: General product combination: that the company intends to offer the target audience in terms of its amplitude (N of product lines offered by the company), length (N of total products offered, depth (N of product variants offered in each single product line, and coherence (the degree of variance between the various product lines offered by the company). It is also important to delineate how the products will evolve throughout their product life cycle in order to better understand how the marketing mix will change as the product (and its underlying industry) changes. Product attributes: in terms of quality (durability, reliability, precision, usability etc.) product characteristics (defining the base product and its evolution throughout its product life cycle) and the styling of the product (which can be considered a personalization variable that can contribute to the definition of the evolution of the product throughout its product life cycle). Branding attributes: in terms of the how the companys brand equity (or lack of brand equity if the company is a start up) will affect the product value. The development of these types of attributes, however, are quite costly, and therefore, must be well articulated in order to be effectively managed during the business planning period.

 Packaging: In some instances, these product attributes can be considered an extension of the marketing mix, which means that in some industries, the packaging element of the product offering can become a key element that can impact the degree of success the product may have. Price: the pricing of a product/service is a key element of the product offering and depends heavily on the strategic objectives that the company has defined in the strategic plan of the business plan. In particular, the price will depend on whether the company intends to follow a strategy that will allow them to: Survive: In case of fierce competition in local and/or global markets, excess production capacity, an ever-changing consumer needs landscape or a mature market, the company may want only to guarantee its survival. As such, its pricing strategy will be one that is dominated by a low-price strategy in order to maximize market share and product acceptance throughout the potential market defined in the previous section of the marketing plan. Maximize revenue or short-term profits: These are typically short-term pricing strategies that allow them to take advantage of possible temporary monopoly positions in which the company has an advantage over its competitors in term of timing. This pricing strategy, however, is only possible when there is a strong and accurate understanding of the demand function AND the cost function of the company. Maximize volumes: With this pricing strategy, the overall intention of the company adopting it is to maximize market penetration. To adopt this type of pricing strategy, the company adopting it must also be willing to offer its products at low prices in order to ensure high volume sales, which in turn mean high production volumes, which in turn take advantage of economics of scale and experience. In other words, for this pricing strategy to be successful, it must be coherent with a consumer that is price sensitive for the product typology, production and distribution costs that diminish with increasing production

volumes, and the fact that low costs can hinder direct and indirect competitors to compete at such low levels. Skimming: This type of strategy is typically adopted when a company launches onto the market a product that is superior in performance, quality and functionality to those of its direct competitors. As such, the intention of this strategy is saturate the market segments that are willing to buy the products at high prices first, and then gradually move down the segmentation ladder to larger target audiences as the price of the product falls. The main hypotheses of this pricing strategy are that: (1) there exist a market segment that is willing to pay a premium price of a product with better/superior performance; (2) that there are very few economies of scale to take advantage of; (3) the absence of direct competitors that are capable of entering onto the market with a similar product at an inferior price; and (4) the ability of the consumer to identify the elevated quality of the product and therefore willing to pay a premium for it. The choice of the price of a product, however, is also subordinate to the characteristics of the defined market. In fact, the pricing strategy is impacted by: Price sensitivity of the consumer. This is directly subordinate to the characteristics of the demand defined for the product/service with particular reference to: Price sensitivity, which is proportional to the uniqueness of the product/service offered, the consumers knowledge (or lack of knowledge) of the existence of substitute products, the quality of the product etc.) Price elasticity of demand Place: to determine the placement of the product, one typically needs to make two fundamental decisions: The choice of distribution channel in terms of typology of intermediaries, number of intermediaries and their underlying responsibilities. Typology: by typology is meant the distribution channel of choice for the sale of the products/services offered by the company. This can be

categorized as either direct or indirect. Based on such a choice, this means that one can define the type of distribution agents needed (Exclusive agents, brokers, wholesalers, detail wholesalers etc. The choice of such a distribution channels are typically determined on the base of three criteria: cost, control and adaptability. For example, the motivations that can push a company to choose from either an internal sales force or a sales force based on external agents can be summarized in the following table.
Internal sales force Superior knowledge of the product/service portfolio sold by the company Stronger motivation Extnernal agents Superior knowledge of product/service portfolio of more companies The existence of already established sales network Motivation based on the commission they receive from the company Their objective is to maximize their profit They are more interested in the sales of an entire package of products/services rather than the single product Lack of flexibility

Cost

Control

Their objective is to maximize sales of the company

Adaptability

Greater flexibility

Number of intermediaries: Here the intention is to chose the size of the distribution channel. One can typically chose from Intensive distribution channels (in order to allow for a vast distribution of the products/services offered I.e. Cigarettes), Exclusive distribution channels (in which the company chooses for a limited distribution of the product I.e. automobiles, white good appliances, apparel (fashion, shoes etc.), and finally selective distribution channels (in which the intention is to take advantage of the intensive AND exclusive distribution channels by offering ones products/services to less exclusive intermediaries while still

maintaining a certain degree of control on how the product will be presented and sold). Responsibility: here the intention is to define and determine the price policies to follow (GSRP General Suggested Retail Price, Sales periods and prices etc), sales conditions (payment conditions, warranties etc), zoning and service policies (I.e. McDonalds guarantees its franchisees not only a certain geographic coverage of the area of operation, but also real estate services, bank guarantees, promotional support etc). Sales operations: For example, the choice of the sales operations/tactics can see the specialized points of sales (with limited, but well assorted product lineups), retailers (many product lineups from many companies), supermarkets, sales by post, telephone or internet, automated sales, or door-to-door sales. Observations: It is important to remember that the principle objective of the model is to be able to articulate the various marketing mix variables in a coherent and competitive manner. For example, if one decides to offer products/services for the luxury market, it is relatively difficult to have these products/services distributed and sold at hard-discount outlets. It is also important to evaluate how the budget will be allocated to the various marketing efforts and how these efforts will change over time. An interesting application of the marketing mix can see the application of the marketing mix over the entire product life cycle (focusing on the most important marketing mix variables that

5.3 DEMAND FORECAST

The objective of this part of the business plan is to identify the penetrated market that the company (through its product offering) intends on reaching via the activities delineated in the business plan. Criticalities: forecasting demand and market trends becomes more difficult as the market turbulence increases. As such, it is paramount to explicate the hypotheses and the dominant market characteristics that can impact the forecasted demand. Techniques used to forecast demand: Ask the consumer via either specialized consulting firms that typically observe and interpret market trends, or via direct consumer contact (questionnaires, surveys, interviews etc). This second method is relatively efficient if the number of consumers is limited, sufficiently close and easy to reach, and have clear purchase motivations. They are typically used for B2B products, durable products and/or products that are new to the world for which no prior data exists Ask the sales force. Instead of asking the consumer, another option is to interpolate the sales force. The advantage of this method is that they are easy to reach and are typically available for confrontation. The drawbacks are mainly related to the degree of objectivity of the information retrieved with a strong influence on the fact that the information will be biased in order to reduce the sales objectives (reduce the amount of work that they need to do in order to sell the products/services that need to be sold). Ask the experts. In using this method, a company is able to ask various different types of stakeholders at the same time. The advantage of this method is that in doing so one can talk to retailers, distributors, suppliers, consultants, associations and other types of experts. The main drawback is the degree of homogeneity of the information that one will retrieve from these stakeholders.

Each, in fact, will be biased by their professional experiences and their personal agendas. Direct market tests

Historical data: In order to use this type of methodology, one requires the
existence of a relatively complete set of historical data upon which to extrapolate information and potential future forecasts. The main drawback of this method is the fact that past data does not guarantee future forecasts. The typical analysis that is done using this method is: V=(T,C,S,E) V= Sales; T= trends: typically a function related to the evolution of population, the accumumation of wealth/capital and the evolution of technologies; C= Sales cycles; S= Seasonality Regressions Q=

(X1,X2...)

The objective is to find the correlation between the demand and a set of independent variables. The method typically used the minimizzazione dei quadrati Observations: Typically the evaluation of market shares and potential markets are done concurrently. In general, if the budget exists, these types of analyses are typically conducted by specialized consulting service companies. Otherwise, these types of analyses are conducted internally. The methods typically used are Deterministic analyses based on sensitivity analyses Stochastic analyses based on calucations of mean and standard deviation (using scenario analyses, each with their own NPV)

6. OPERATIONS PLAN
The main objective of the operations plan is to evaluate how a company can manage the transitional phase from when they decide to implement the business idea to when the business idea is fully functional. (I.e the ramp up phase) Typically, this is done on two levels: The first method is related to the value chain analyses introduced before in this document.

Each subprocess needs to be setup in such a way to guarantee the coherence between the chosen strategic direction (I.e. Cost leadership, differentiation or focalization) and the operations that need to be carried out during the development of the business idea. For example, based on the strategic direction sought in the strategic plan, one must chosen the type of: Operations (production typology) Logistics (inbound and outbound) R&D management and prototyping Sales, assistance and post sales services For each sub process, in this part of the business plan, it is opportune to distinguish between (and detail) Policies and operative strategies Competitive advantages/differentials that can/should be taken into consideration from the strategic plan) Activities and processes

 Description of the inputs (be they material or immaterial) as the choice of these inputs will for sure impact the cost structure and economic forecasts of the financial plan The suppliers that are deemed critical for the phases of the value chain For example: Operations How does the company produce its products in terms of necessary resources, processes and potential output (theoretical quality of the products/services etc) Resources and processes: Everything from the type of facility, dimensions, location, proximity to fundamental transport services, the characteristics of the raw material, suppliers and their availability, price variabilities, organizational structure etc. Output: forecasted quantity and productivity considerations/conditions/limits, theoretical quality, quality control mechanisms It needs to be clear that the capital invested by the company/investors is able to cover the necessary resources for the company operations One also needs to take into account the growth of the company with time and how this will impact the operations of the company. In the case of business ideas that operate in the field of distribution and in service development, it must be clear how the company intends to manage the relationships between suppliers, how responsibilities and other specific factors related to the business (I.e. in the case of resellers, the inventory management system that needs to be put into place etc.) Support services (Sales, assistance and post sales) These are typically a set of operations that are more and more critical success factors for todays business: especially when dealing with complex products.

 A good post sales service in fact can be a very useful tool to preserve and augment the reputation and the fidelity of the consumer towards the company. Moreover, it these types of company operations can also guarantee a secondary source of revenue for the company (which in some cases can also become primary sources of revenue: I.e Autmotive industry and insurance, extended warranties etc) R&D and technology management An important aspect is to highlight the patents, licenses and copyrights that are developed within the company and how the company intends on managing it Intellectual property rights. Related to the above point, the company must also clarify what parts of the producs/services can be defendable and how the company intends on managing the defence of these key parts of the product and service the offer. Another important aspect is to evaluate the impact that protecting its IPR will have and how it may be transformed into a competitive advantage in the long run. It is also opportune for the business plan to highlight potential external factors that may influence the various operations made explicit in the value chain of the company. For example: Technological changes: In order to make the business plan more complete, it needs to examine the future evolutions of the available technologies, and how these evolutions can impact the competitive positioning of the company. Client evolution and how it may be able to impact and influence the structure of the industry or companys business Normative or Governmental factors that may impact the business idea. In particular, one needs to also understand and clarify the nature, origins and the influences they may have on business in order to understand how the company can influence these factors to favor its business.

All these above observations can result very important to map the timing of the operations and the activities that need to be scheduled in order to make the business idea become reality. (typical techniques are PERT and CPM). In fact, it is important that within the operations plan of the business plan there exist a planning of the various activities that must be carried out in order to bring the business idea to operate at full regime. What follows is a simple example that illustrates the various important macro activities that must be accomplished in order to develop a new production plant.

7- MANAGEMENT/ORGANIZATIONAL PLAN
Within this part of the business plan, the objective is to clarify the salient aspects of how the business idea will be managed and organized in terms of: (A) The critical human resources: Here the intention is to identify and clarify (1) who are the critical human resources that can guarantee the success of the business idea, (2) how they can give credibility to the initiative, and finally (3) what role they will play within the business idea/initiative. Typical players can be: Founders Investors (active investors that will play a role within the company) Key employees Consultants For each of these people, one needs to briefly clarify their past experiences (CV), and, in the case that these key players currently hold positions in other companies, it may be opportune to keep their identity private, but explain how the company intends on appropriating the resource. (B) The organizational structure: The organizational structure of the business initiative needs to be coherent with the strategies and operations that were presented and detailed in the other parts of the business plan. A typical reference model to guide how the company can be structured was developed by Mintzberg:

On the line of action, we can find the: Operative nucleus/structure, which consists of all the people that are directly responsible for the realization of the products and services, the inbound and outbound logistics, the transformation of the products, the sales and the post sales operations of the company Upper management structure that typically include the General Manager of the business initiative and the other players that can guarantee the future of the company in terms of control, performance and profitability. In particular, their role is to manage the company in terms of strategy development, the allocation of resources, decision making, conflict resolution, the definition of incentive mechanisms, as well as external relations within and external to the industry. Middle management structure is the intermediate managerial stratus that that manages the day-to-day operations of the companies workload. In particular, the dynamics of middle management depends mainly on the coordination methods and mechanisms put into place (I.e. if the company decides to adopt a direct supervision approach, the company is considered to be relatively verticalized since the number of people that can be controlled by middle management is limited). At this level, the main decisions are therefore to understand how to better

structure the company (matrix, hybrid, departmental, functional structures etc.). Typically, at this level the type of structure also entails understanding that there is communication that comes from both upper management and the operative structure. At the staff level, we can identify two main categories of resources: Technostructure or infrastructural overhead that typically analyze the production processes, plan and control the production processes and the human resource specialists within the company (the secondary activities of Porters value chain). Support staff, who are the people that are responsible for the various support activities of the company (legal staff, industrial relations, administration etc). To design and plan the organizational structure of a company, one needs to created a detailed design of the following aspects: The individual company profiles in terms of: Degree of specialization: both horizontally (in terms of the number of tasks they must be responsible for) and vertically (in terms of the degree of executive control of the tasks carried out) The formalization of each profiles job descriptions in terms of responsibilities, quality control certifications and/or behaviors. Continuous education and indoctrination whereby the firms focuses on the acquisition of new professional competencies, while the second concentrates on the organizations rules, regulation, culture etc. The companys macrostructure in terms of defining how many and what type of people/professionals need to be called upon for each organizational/business unit of the business idea. In particular, this means defining: Criteria: One needs to identify a set of criteria in order to group different resources together under the same organizational/business unit. For example, criteria could be based on the type of responsibilities/tasks carried out

(therefore, based on competencies on specific company processes finance, administration, marketing etc), the type of market (therefore based on the type of output, client or geographical area), timing (I.e. grouping people within a unit based on work shifts etc.). Dimensions: One needs to understand how large/small the organizational/business units can/should be in order to facilitate coordination, scope and objectives, and financial considerations. To complete the organizational structure of the company, after having identified the organizational/business units, it is then necessary to define: Links between units via: The development of planning and controlling mechanisms that can measure the performance and functionality of the various organizational units (Ie. Adopting the Balanced Scorecard Methodology etc) The development of linking mechansisms/roles such as job rotation (increasing the number of competencies of a companys staff) or through tasks forces, case managers, project managers etc. The degree of decentralization (horizontally and vertically both on the line of action and within the support staff) (C) Human resource management systems in terms of Evaluating the recruiting mechanisms that are most opportune for the various organizational units (based on the type of profile and number of staff one needs to hire) Defining the evaluation and incentive systems that will allow the companys staff to develop career paths within the company. It may also be opportune to insert a forecast in terms of how the organizational structure of the company will evolve throughout the timing of the business plan.

8. FINANCIAL STRUCTURE
By financial structure, this part of the business plan intends on defining the following financial elements that are pertinent to the development of the business idea: The juridical structure of the entity that will house the business idea The financial resources needed The sources of financing THE JURIDICAL STRUCTURE In terms of the juridical structure of a company, it is paramount to determine: The minimum necessary equity needed The definition and articulation of the responsibilities that each partner must adhere to, and the guarantees that each supply the company The complexity of the financial model from a tax perspective The possibility of issuing an IPO Possible tax breaks etc The relationship between the owners and the operative control of the entity that will govern the operations of the company.

THE FINANCIAL RESOURCES NEEDED The objective of this part of the business plan is to identify the needed cashflow that the company needs in order to make the business idea a reality. This part of the business plan, in fact, is a summary of the consideration that are made in the financial/economic forecast which we will discuss in the next section of the business plan. Having said this, the typical steps to take to develop a financial forecast are: The development of a financial forecast in terms of the capital expenditure needed to purchase the material (machinery, facility, land etc.), immaterial (I.e. patents, brand etc) and recurring costs of the business idea.

 The forecast of the capital needed for the WIP (work in progress/process) items and eventual liquidity issues which can be summarized in the calculation of the OWC (operating working capital) = inventory + Accounts receivable Accounts payable In general, it is better to ask for more capital than is necessary and be able to say that, based on the forecasted amount the company was able to reduce its capital expenditure than the contrary. THE SOURCE OF FINANCING This part of the financial plan is to detail how the business initiative intends on being financed. In particular, it has the objective to find and evaluate different methods of financing to reduce the amount of capital that needs to be raised to cover the costs of the initiative. The most salient aspects that need to be considered when evaluating the various sources of financing are to consider: The companys degree of liquidity the companys Return On Equity ROE = ROI + D/E* (ROI-r) where: ROE = Return of Equity = Profit / Equity ROI = Return of Investment = Net Operating Margin/ Invested Capital (ROI measures how effectively a company uses its capital to generate profits. In fact, the higher the ROI is the better it is for the company) D = Debts E = Equity r = Interest rate related to the debt/financial debt From the calculation of ROE, one can evaluate the following situations

 If (ROI-r) > 0, ROE increases IFF (if and only if) the ration between D/E increases; If (ROI-r) < 0, Increasing D/E implies a decrease in ROE This type of conclusion, however, must be treated with the right amount of caution. In fact, if a company decides to leverage greater amount on debt, the calculation upon which this decision is made is based on a future forecast of ROI. Consequently, if the ROI is not attained, this meanst that the company may run the risks on being insolvent with respect to its contractual debt, which may lead to bankruptcy or takeovers. The typical types of methods used by companies to raise capital are Short and long-term debts (acting upon the liabilities of a company) Issuing of shares, preferred shares or bonds (acting upon the equity of a company) Many different types of hybrid methods such as convertible bonds, derivatives etc.

9 FINANCIAL PLAN
Generally speaking, this part of the business plan is typically approached via a pseudo-deterministic analysis perspective. In other words, it means that the principle characteristics of this approach implies: Using deterministic (or quasi-deterministic) variables to construct financial prospectus for the medium/long-term. Typically a 3/5-year period of time. Anything longer would reduce the accuracy and feasibility of the forecasts given the inability to forecast the future. Using the hypotheses that have been outlined in detail in the previous sections of the business plan (I.e. Marketing plan, Operations plan and Organizational plan etc). For example, if in the marketing plan one decides that it is necessary to invest in a promotional campaign in which the presence of Hollywood stars in needed, this cost will need to be entered into the financial forecast. Consequently, this means that it will enter into various parts of the financial plan depending on the type of expenditures forecast in the marketing plan (Ex. Ammortization costs in the Balance Sheets or as promotional expenses in the Income statement etc. The choice will be made while developing the financial plan whether or not to decrease the net profit in the income statement or decrease the assets in the balance sheet) Using the quantitative and qualitative information obtained from the previous sections of the business plan to determine the: Investments: For example, from the marketing and operating plans, one can determine the what needs to be capitalized in terms of material and immaterial resources etc. Costs: obtainable from the marketing, operating and organizational plans in terms of resources needed Forecasted sales.

 With respect to the 3/5 years of the business plan forecast, it means constructing the: Balance sheets that take into consideration the investments, assets and liabilities of the company Income statements that take into consideration the revenues and costs associated with the company
Cash flow statements whereby the meaning of cash flow is that it is an

indicator of the liquidity that a company was able to generate during the year in question.
CASH FLOW = PROFIT + AMMORTIZATION = REVENUES MONETARY COSTS

NB: The cash flow statement differs from the Income statement in that it only considers the incoming cash flow of a company (not revenue) and only the outgoing cash flow of a company (not costs). Only cash is involved in the forecast and statement. Sales on credit do not form a part of these documents until you receive the actual cash. Moreover, amortization and depreciation expenses are NOT considered in cash flow statements because they are noncash item With respect to the profit & loss statement (income statement) a cash flow statement is:

More objective since it does not include non-cash items such as amortization and depreciation. In fact, for fiscal reasons, whenever profit calculations seem too elevated, it is possible to opt for an anticipated amortization and depreciation plan to decrease the earnings before income taxes (EBIT) so as to decrease the amounts payable in taxes.

Less complete because it does not take into consideration amortization and depreciation, which means that it does not take into consideration the age of

the technologies used for the development of the products and services developed. Moreover a cash flow statement allows a company to determine the relationship between the balance sheet and the economic value of a company. In fact, the liquidity generated during the year can be used to:

Invest in fixed assets/capital (invest in new technologies etc)

OWC = INVENTORY + ACCOUNTS RECEIVABLE ACCOUNTS PAYABLE

Invest in working capital This calculation illustrates that Increasing the volumes sold, the average level of inventory increases, and, as a consequence also the capital necessary to maintain it. Changing client/supplier relationships, the necessary working capital may also change. For example, by modifying the payment terms, accounts receivable change, which implies that operating working capital will change accordingly. Even exogenous variables such as inflation rate changes may impact the OWC in monetary terms (I.e. the value of the inventory changes based on the buying power of the currency), Pay financial debts Distribute dividends to shareholders or equity holders OTHER TYPES OF INFORMATION Other business plan indicators that may prove useful to convince investors to support the business idea may be: Liquidity ratios Current ratio (Current Assets/Current Liabilities) Acid test ratio (Current Assets Inventory)/Current Liabilities Other financial rations ROE, ROI, ROS (Return on Sales = Net operating Margin/sales)

 Debt/Equity ratio INVESTMENT EVALUATIONS The data/information contained in the balance sheet, income statement and cash flow statement, aside from being able to evaluate the health of a company through various financial ratio analyses (profitability and liquidity), can also be used to evaluate the investment opportunity in question. In particular, it is possible to evaluate the investment via two approaches Capital budgeting calculations
NPV = #
T

CF(t) V (T) + $ V (0) t t=1 (1+ " ) (1+ ") t

V(0) = The initial investment.

!

CF(t) = The cash flow value per period.(from cash flow statement) = Discount rate of interest associated with the business idea. It is possible to use the opportunity cost value for similar companies operating within the same industry. However, in most cases, due to the novelty of the business idea, it is difficult to calculate the opportunity cost of such initiatives. Consequently, one must evaluate the rate of risk associated with the initiative by: Taking the average risk rate from financial intermediaries who typically evaluate business plans or closed investment funds Conducting a sensitivity analysis Evaluate the Internal Rate of Return which is the compounded interest rate (annual interest rate) that equates the present value of the future cash flows with the initial outlay (investment); V(T) = Terminal value of the initiative at time T where it can be evaluated as: A multiplier of the Price to equity ratio (to earnings per share) Equating V(T)) = 0

 The salvage value of the investment in which it is estimatable by taking from the balance sheet the material and immaterial assets of the company and multiplying it by an appropriate coefficient (0;1) A perpetuity:
NPV = $
T =# t=1

CF(t) (1+ ") t

! Payback time calculations PB(t) = $

t t=1

CF'(" ) (1+ # ) t

where
!

CF(0) = -V(0) + CF(0) CF(t) = CF(t) CF(T) = CF(T) + V(T)

This type of calculation allows one to identify the instance in which the future cash flows of the company are sufficient to repay the initial investment. Some notes related to the Payback calculations are: This type of calculation is valid mainly when the company developing the business plan does not ask for capital investment from shareholders. It is unclear as to what happens after the payback period. Having said this, having a reduced payback period is a good guarantee (if calculated accurately) If is opportune NOT to use the Payback period calculation/methodology as the ONLY valuation indicator. SENSITIVITY ANALYSIS In this pseudo-deterministic approach to the valuation, some of the parameters used to evaluate the initiative may vary according to certain exogenous and endogenous phenomenon. For example, inflation may impact the valuations in at least two ways:

 The revenues and costs are calculated nominally and then actualized at a nominal opportunity cost (rate) that takes into consideration inflation; The revenues and costs are calculated relative to year zero and one uses a real discounted rate that does not take into account the inflation of prices.