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