Strategic Business Planning Part 2

Copyright © March 2004Wharton Small Business Development Center

STRATEGIC BUSINESS PLANNING

Welcome! Session 2 – July 13, 2004

Instructor - Kevin [email protected]



The Wharton SBDC is part of Wharton Entrepreneurial Programs and the Sol C. Snider Entrepreneurial Research Center. The Wharton Small Business Development Center is in part financed by a grant from the Commonwealth of Pennsylvania, Department of Community and Economic Development. The Wharton SBDC is funded under Cooperative Agreement No. 4-603001-2-0040-24 by the U.S. Small Business Administration. The support given by the U.S. Small Business Administration through such funding does not an expressed or implied endorsement of any of the co-sponsors’ or participants’ opinions, findings, conclusions, recommendations, products, or services.

All SBDC programs are non-discriminatory and open to the public. Reasonable arrangements for persons with disabilities will be made if requested at least two (2) weeks in advance. Please contact Dr. M. Therese Flaherty, Director, Wharton Small Business Development Center, University of Pennsylvania, 433 Vance Hall, Philadelphia, PA 19104, (215) 898-8635.



Agenda – Session 2

Recap from Session 1 and Handouts Value Proposition Interview Results Analysis of Industry and Competitors Operating Plan Sales Projections and Marketing Plan Preparation for Next Session and Homework



Recap – Session 1 The Executive Summary

A 1-2 page high-level overview of your business Typically the last part of the business plan to be completed!

The Mission Statement Brief – Flexible – Memorable Market – Contribution - Distinction

Product and Service Descriptions What are you selling? Who wants to buy it? Benefits and features

Writing and Testing Your Value Proposition



Session 1 Homework Review

Revise and refine the Executive Summary Finish drafting your Product/Service descriptions Finish writing your questions to test your Value Proposition Interviews - test your assumptions with customers and suppliers Draft your Business Description Draft your Management Team Overview



Interview Results: Field Testing Assumptions About Your Value Proposition

Interview your customers to validate your assumptions about the following: Why do your customers purchase from you? What do they perceive as your “value add” to the purchase? How is your value differentiated when compared to other providers? How long will you be able to maintain that distinction? Why?

Interview your suppliers to validate your assumptions about the following: Why will customers purchase from you? What will they perceive as your “value add” to the purchase? How will your value be differentiated or unique when compared to

other providers or substitute products/services? How long will you be able to maintain that distinction? Why?



Discussion: Interview Results Perception vs. Reality vs. Vision Perception

Your perceptions about the business model Customer and supplier perceptions

Did the interviews reveal a different reality for your customers and suppliers?

Has your vision for the business changed? Refining your Value Proposition



Refining Your Value Proposition From the perspective of your target market:

Does your plan solve a problem? Does your plan save money? Does your plan create new efficiencies? Does your plan present a more attractive alternative to

current options? From the perspective of your suppliers:

Does your plan present strong competitive advantages? Does your plan appear to be sustainable? Have you come up with a strong set of features that create

the benefits customers in today’s market want?



- 10 Minute Break -



Analyzing Your Industry Who Defines Your Industry?

Your Competition, the Government, and Wall Street professional associations, guilds/unions, trade publications, conventions licensure and/or certification requirements NAICS (North American Industry Classification System) Analyst research, tracking, and reporting categories

Key Metrics and Trends How are companies compared to one another in your industry?

Are you using comparable metrics in developing your business plan? Identify the most significant financial and operational measurements for your

industry and plot the trends over the last 5-10 years – insight?

Concentrations of Effort and Resources Geographic locations and trends Acquisitions and divestitures Recent innovations, new business lines, product/service changes Which customer groups are regarded as most valuable? Least valuable?



Michael Porter’s “Five Forces” Model

This is a general model of the environment in which companies operate that suggests what factors strategists should monitor. They key factors are buyers, suppliers, competitors, new companies that might enter the market, and new products or technologies that might replace those on which your organization depends. The model is defined in Michael Porter's book Competitive Strategy.



Analyzing Your Competition Competitors Inside and Outside Your Industry

For competitors in your industry Those who operate in the same location Those who could (and may be likely to) begin operating in your location

Potential new competitors Companies currently serving the same group of customers Companies currently working with the same group of suppliers The “kids in the garage”, “profit hounds”, and corporate venturing

Location, Customers, Size, Strength, Agility How many other companies are there within the same geographic area you expect to

attract your customers? How many customers in total are in that defined area? What, when, and how much do

they buy? How are new customers created? How is market share divided among existing competitors? Is market share relatively

stable or has it shifted in recent years? How does market share relate to revenue and profit in this industry and location? How would customers describe the reputations of the top competitors? Examine the competition’s current “actual” mission statements and value propositions?

How quickly have competitors responded to changes in the past? Are they positioned to innovate or adapt their business models as new opportunities and challenges arise?



Building the Business Model

Cost Projections Sales Projections

Pro Forma Financial Statements

Operating Plan Marketing Plan

Financial Plan

What will it cost to produce your product or service?

What will it cost to sell any given amount of your product or service?

How will your business make money? How much? For how long? Risks?



Operating PlanWhat will it cost to produce your product/service?

“Plant, property, and equipment” costs For simplification, include costs related to where you will work and the

durable equipment you need to perform the work Materials Management and Employees Other recurring expenses

Packaging, storage, shipping, distribution Travel and entertainment Accounting, taxation, and legal services

Other expenses specific to your business? Regulatory fees, permits, or licenses? Disposal fees?

Start thinking about the timing of these expenses – are they every month? Fixed or variable costs? Lease vs. buy? Do the costs fluctuate or are they generally stable?Start with narrative overview – assign numbers to the narrative as a 2nd step!!



Sales ProjectionsHow many units of your product/service do you plan to sell?

Understanding volume and fully-allocated unit costs Given the number of units you can produce in your first 3/6/9/12

months, what are your unit costs expected to be? Total fixed and variable expenses from operating plan, divided by the

projected number of units you will sell in your first 3/6/9/12 months

Understanding the effects of pricing Price elasticity and current pricing ranges Positioning and target markets Go back to your value proposition!

Sales channels Relative strengths and weaknesses, pro’s and con’s Strategic basis for selection

Seasonality? Business cycles? Geography? Demographics?

Start thinking about how you will explain and defend the numbers In your sales projections – remember to test your assumptions wherever possible!



Sales Projections- Using the Sales and Cost Assumptions Worksheet



Marketing PlanWhat will it cost to sell any given amount of your product/service?

Rule #1 – Don’t confuse marketing with sales! Marketing builds awareness and acceptance of your product Strong sales strategy has to back up each marketing initiative!

Who exactly needs to be made aware of your product/service? Market research – how do these customers prefer to be reached?

Direct mail? Email? Via retail outlets and promotion? Television or radio advertising? Print ads in magazines? Articles in the WSJ? Relative CPM?

Response rates and conversion to sale ratios Evaluate costs relative to their ROI and prioritize accordingly

Promotion and Public Relations Designed to develop public awareness of your Value Proposition Promote the benefits, not the features Always suggest the next step for your customer!

The weakest assumptions in most plans are those about what will be effective in reaching customers – choose a strategy, test the results, then determine your next steps. Remember – every marketing initiative needs a strong follow-up sales effort!



Timing Example - Operations, Marketing, and Sales Interactions in the Financial Statements

Operating Expenses

Marketing Expenses

Revenues (Sales)

January February March April May June

Fictional example for illustration purposes only!

Sales Related Operating Expenses

Fulfillment Related Operating Expenses



Homework Assignments Develop a draft of your Operating Plan

Start with the narrative overview and move into estimates of expenses Provide a month-by-month estimate of operating expenses for the next three years

Develop a draft of your Sales Projections Define units of sale, unit costs, and explain your pricing strategy Provide a month-by-month estimate of sales (# of units and price) for the next three

years

Develop a draft of your Marketing Plan Research your industry’s metrics – how do established companies in this industry

spend money to reach customers? Provide a month-by-month estimate of marketing expenses for the next three years

Questions about the assignments?



Next Session (Session 3)

Developing the Financial Plan Bringing the operating, marketing, and sales plans together

Analyzing Your Sales Projections What bankers, investors, and MBA’s will do with your plan

Understanding and Describing Cash Flow Or, how much money you really need to start your business

Preparing to Write the Actual Business Plan How to put all of the pieces together from Sessions 1-3

See You Next Week!