Business Plans

1. 1 Business Plans Professor Jim Nolen McCombs School of Business Department of Finance The University of Texas at Austin

2. 2 Purpose of Business Planning Provide a roadmap for success of the company Force the entrepreneur to formalize their vision and do the research to answer hard questions about the company, its industry and the competitive landscape Set goals, strategies, policies and procedures for the firm A tool for raising capital

3. 3 What is a Business Plan A story that explains how the enterprise work Answers Peter Drucker�s questions: Who are the customers? What does the customer value? Answers fundamental questions about the firm�s business model: How do we make money in this business? How does money come into and go out of the company? Can we deliver value to the customer at an appropriate cost?

4. 4 What is a Business Model A variation on the generic value chain underlying all businesses Activities associated with making something: designing it, purchasing raw materials, manufacturing, etc. Activities involved in selling something: finding and reaching customers, transacting a sale, distributing and delivering the product or service.

5. 5 What is a Business Model Similar, but not the same, as business strategy. Business Models describe as a system how the pieces of a business fit together and do not consider one critical dimension performance: Competition Competitive Strategy explains how you will do better than your rivals in ways they can not duplicate

6. 6 What is a Business Model Provides a better method or process than existing alternatives. More value to a discrete group of customers or filling an unmet need Replace an old way of doing things � process innovation or new distribution channels Becomes the standard Provides insight into the motivation of everyone in the value chain. Capitalizes on a shift in supply or demand for products or services

7. 7 Why business models succeed Being at the right place at the right time Adaptive to change Good people will follow a visionary and a leader Customers will show loyalty when treated properly and shown the value proposition Capital will follow the management team that can demonstrate the ability to focus on their model and produce operational excellence

8. 8 Why business models fail They fail the narrative test (the story doesn�t make sense) or the number test (the spreadsheet doesn�t add up) Examples: Priceline Webhouse Club � Extended �name your own pricing� to groceries and gasoline. Consumers could specify price but not brand of peanut butter or gasoline, but Jiffy and Exxon did not want to help Webhouse teach consumers to buy on price alone and undermine their prices and brand identities. (story doesn�t make sense) Webvan � Added costs for on-line groceries in a low margin industry and found customers were not willing to pay significantly more. (Numbers didn�t add up)

9. 9 Why business models fail They underestimated the competition and how their model would stand up under pressure Retaliation of existing competitors or entry of new competitors Substitute products or services They fail to adjust to economic, industry or competitive changes. Industry Consolidation Social, political, regulatory, technological, or environmental changes

10. 10 Your Business Plan Should Address What problem you are solving and how serious it is? Is it �nice to have� or �have to have�? Who has this problem and why it is important to them? Is this a compelling purchase for the customer? Do you have the right people to solve this problem? How large is the market and how fast is it growing? Who else is trying to solve the customer�s problems or provide the service? What is going to give you an unfair competitive advantage? How are you going to generate revenue? (revenue model - i.e., transaction fee, flat fee, licensing) What are your key milestones?

11. 11 Industry Analysis Few firms fail because they could not produce the product or service, most fail because they missed the market and the competition. Industry Analysis � Where will your company be positioned for profitability and cash flow Supplier and Customer Power Existing Rivalry and Threat of New Entrants Substitutes Buy Low, Sell High, Collect Early & Pay Late When do you have to buy and pay for resources? How long does it take to acquire a customer? How long before the customer sends you a check? How much capital equipment is required to support a dollar of sales?

12. 12 Industry Analysis:Michael Porter�s Five Forces

13. 13 Bob Fabio�s What�s What messages . . . to reach What market(s) . . . with What pain . . . that need What product(s) . . . distributed through What channel(s) . . . against What competition . . . with What pricing and packaging . . . to deliver What value . . . in What time frame?

14. 14 Market Opportunity/Validation How will the product or service be priced? How will you reach the target customer? How much does it cost to acquire a customer in time and $? How much does it cost to produce and deliver the product or service? How much does it cost to support a customer? How easy (expensive) is it to retain a customer?

15. 15 COMPETITION Who are the current competitors? What resources do they control and what are their strengths and weaknesses? How will they respond to our decision to enter the business and what can we do? Who else might notice and enter our market? Can we build barriers to competitors by forming alliances?

16. 16 How Do Businesses Compete? They Fill Needs That Are Not Being Met They Find Customers and Suppliers Who Are Weaker Than They Are They Get More Out of Less They Use Other People�s Money (OPM) The Try to Stay Out of the Way of Larger & Meaner Competitors (Nibble at the Edges)

17. 17 Company Analysis:SWOT Analysis Strengths � What are the company�s core competencies? What does it do better than anyone else? How can the firm leverage these competitive advantages. Weaknesses � What areas does the company have a need for improvement? What are the obstacles for implementing change? Opportunities � What are the opportunities and how can the company capitalize on them. How important is timing to the decision? Threats � What are the internal and external threats to the company. How can the company mitigate these risks?

18. 18 Financial Strategies All companies have similar financial goals � namely, to maximize shareholder wealth. Companies employ different strategies and tactics to achieve this goal. Some work off maximizing profit margins through differentiation or intellectual property (Software/ Pharmaceuticals) Some work off scale (Mass Merchandisers) Some work off efficient asset utilization (Airlines) Some work off leverage (Financial Services)

19. 19 4 Generic Strategies

20. 20 Value Drivers Three-Factor DuPont Analysis for ROE 

21. 21

22. 22 Improving ROE ROE can be improved by Increasing Revenue (Profitable Growth) Decreasing Expense (Controlling Costs) Decreasing Assets (Increasing Asset Efficiency/Utilization) Increasing Liabilities (Increased Leverage � Other People�s Money) All of these are constrained by economic, industry and competitive forces and affect the risk and value of the firm.

23. 23 Elevator Pitch Bill Gates and Michael Dell are in the Elevator with money to burn. What do you say to them to get them excited about your project? Before they get off on the next floor. You have 30 seconds! You won�t get a second chance!

24. 24 250-Word Summary Summarize deal in one e-mail screen Company Name and Location Product Space Description Key People Description of the entire business idea in as few words as possible Capital Requirements

25. 25 Present Your Idea in 12 Slides!

26. 26 Business Plan Components Executive Summary Customer Need and Business Opportunity Business Strategy and Key Milestones Marketing Plan Operations Plan Management and Key Personnel Financial Projections

27. 27 Business Plan Details Executive Summary Business opportunity, business model, addressable market, product/service description, technology and management team Market Validation � Have real customers paid real dollars because the perceive real value? What Can Go Right and What Can Go Wrong? Summary of five-year income statement, profit, head count and capital requirements

28. 28 BP Details, continued Customer Need and Business Opportunity Product/service idea and technology description Strategic Value Triangle for end users and customers Business Strategy and Key Milestones Plan to out-maneuver the competition Show each milestone with the cumulative cash needed and head count

29. 29 BP Details, continued Marketing Plan Basic need and company solution Ideal customer and value proposition Market segmentation and size of markets Channels of Distribution Strategic Partners

30. 30 BP Details, cont. Marketing Plan, cont. Business model and branding plan Sales strategy and plans Customer support Five-year sales forecast Competition, positioning and unfair advantage (proprietary position)

31. 31 BP Details, continued Operations Plan Engineering plan Web site plan Manufacturing or outsourcing plan (Make/Buy) Facilities and administration plan Management and Key Personnel Organization Chart Staffing plan (timing) and head count projections Detailed resumes of founders and key employees Are management and employees aligned with success of the company? An �A� management team with a �B� product is superior to a �B� management team with an �A� product

32. 32 BP Details, continued Financial Projections Overview and key assumptions Best, Worst and Expected Case Versions Five-year forecasts � Balance sheet, Income statement and Cash Flow Stmt by month for one year, by quarter for two years and annually for remainder of years.

33. 33 BP Details, continued Historical Income Statements Historical Balance Sheets Historical Cash Flow Statements Valuation Analysis Exit Options Return on Investment for each option

34. 34 Summary A good storyteller (entrepreneur) is an evangelist and is passionate about their idea. Have they validated their idea or concept with real, paying customers? Have they aligned all the parties in the value chain Have they formed the key management group? How do they plan to retain them? What company culture have they created? How well do they know the industry and the competitors? Re-planning � As the economy, the industry and the competition changes, how well has the management team responded to these conditions?