Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 8-1.

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall8-1

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8-2

Chapter 8

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

The easiest part of launching a new business is coming up with the ideaBut, the great idea is just the start

Planning for a new business requires: 1.Feasibility analysis: should we proceed with this

idea?2.Business model: how should we proceed with this

idea?3.Business plan: transforming the idea into a

successful business

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New Business Planning Process


A feasibility analysis consists of four interrelated components:

1.An industry and market feasibility analysis2.A product or service feasibility analysis3.A financial feasibility analysis4.An entrepreneur feasibility analysis

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Elements of a Feasibility Analysis


Industry and Market Feasibility AnalysisTwo areas of focus:

1. Determining how attractive an industry is overall as a “home” for a new business

2. Identifying possible niches a small business can occupy profitably

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Begin with a broad look at the industryUse Porter’s five forces model

Five forces interact with one another to determine the setting in which companies compete and, hence, the attractiveness of the industry:

1.Rivalry among competing firms2.Bargaining power of suppliers3.Bargaining power of buyers4.Threat of new entrants5.Threat of substitute products or services

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Porter’s Five Forces Model


1. Rivalry among companies competing in the industryStrongest of the five forcesIndustry is more attractive when:

Number of competitors is large, or, at the other extreme, quite small

Competitors are not similar in size or capacityIndustry is growing fastOpportunity to sell a differentiated product or service

exists

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2. Bargaining power of suppliers to the industry The greater the leverage of suppliers, the less

attractive the industry Industry is more attractive when:

Many suppliers sell a commodity product Substitutes are available Switching costs are low Items account for a small portion of the cost of

finished products

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3. Bargaining power of buyers Highest when the number of customers is small and

cost of switching to a competitor’s product is low Industry is more attractive when:

Customers’ switching costs are high Number of buyers is large Customers want differentiated products Customers find it difficult to collect information for

comparing suppliers Items account for a small portion of customers’

finished products

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4. Threat of new entrants to the industryThe larger the pool of potential new entrants, the less

attractive the industryIndustry is more attractive to new entrants when:

Advantages of economies of scale are absentCapital requirements to enter are lowCost advantages are not related to company sizeBuyers are not loyal to existing brandsGovernment does not restrict the entrance of new

companies

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5. Threat of substitute products or services Substitute products or services can turn an industry on

its head Industry is more attractive to new entrants when:

Quality substitutes are not readily available Prices of substitute products are not significantly

lower than those of the industry’s products Buyers’ switching costs are high

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Five Forces Matrix


A niche strategy can be a good way to enter a market, but carries some risks:Can require adaptability of initial plansNiches change Niches can go awayNiches can grow

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1.An industry and market feasibility analysisA product or service feasibility analysis

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2. Product or Service Feasibility Analysis: Is There a Market?

Determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce it

Two questions:Are customers willing to purchase our good or

service?Can we provide the product or service to customers

at a profit?

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Primary research: collect data firsthand and analyze itCustomer surveys and questionnairesFocus groupsPrototypesIn-home trials“Windshield” research

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Secondary research: gather data that already has been compiled and analyze it Trade associations and business directoriesIndustry databasesDemographic dataForecastsMarket researchArticlesLocal dataThe Internet

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1.An industry and market feasibility analysis2.A product or service feasibility analysisA financial feasibility analysis

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3. Financial Feasibility Analysis: Is There Enough Margin?Capital requirements

Must have an estimate of how much start-up capital is required to launch the businessBootstrapping

Estimated earningsForecasted income statements

Time out of cashSurviving at current rate of negative cash flow

Return on investment:How much investors can expect their investments to

return

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1.An industry and market feasibility analysis2.A product or service feasibility analysis3.A financial feasibility analysisAn entrepreneur feasibility analysis

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4. Entrepreneur Feasibility: Is This Idea Right for Me?

Entrepreneurial readiness: knowledge, experiences, and skills necessary to have any chance of being successful

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Most entrepreneurs use a visual process such as whiteboarding when developing their business modelsDevelop a business model canvas comprised

of nine segments

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Business Model Canvas


1. Value PropositionProducts and/or services offered to meet the

needs of the customers2. Customer Segments

Narrowing the target market focuses resources on serving a specific group of customers

3. Customer RelationshipsHow do customers want to interact with the

business?

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4. ChannelsChannels refer to both communication channels and

distribution channelsDefine how the customers seek out information about

this type of product5. Key Activities

Build a basic checklist of what needs to be done6. Key resources

Human, capital, and intellectual resources needed

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7. Key partners Suppliers, outsourcing partners, and so on

8. Revenue streams How will the value proposition generate

revenue?9. Cost structure

What are the fixed and variable costs necessary?

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Developing a business model is a four phase process:1.Create an initial business model canvas2.Test the problem that the entrepreneur thinks the

business solves for the customer3.Test the business model in the market

Business prototypingLean start-upMinimum viable product

4.Make changes and adjustments in the business pivots

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Business plan: a written summary of an entrepreneur’s proposed business venture, its

operational and financial details, its marketing opportunities and strategy, and its managers’ skills

and abilitiesServes two functions:

1. Guides the company’s growth and development2. Attracts lenders and investors

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To get external financing, an entrepreneur needs to pass three tests:

1.Reality test2.Competitive test3.Value test

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Common elements of a business planTitle page and table of contentsExecutive summary Mission statementCompany historyBusiness and industry profileBusiness strategyDescription of products/servicesBusiness and industry profileGoals and objectives

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Business strategyCompetitor analysisMarketing strategy

Showing customer interestDocumenting market claims

Target marketAdvertising and promotionMarket size and trendsLocationPricingDistribution

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Description of the management teamPlan of operationPro forma (projected) financial statements

Forecasts should be realisticInclude a statement of assumptions

The loan or investment proposalFunding sourcesRepayment scheduleImplementation timetable

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Visualizing a Venture’s Risks and Rewards


Visualizing a Venture’s Risks and RewardsA working business plan is used to guide the

entrepreneur A presentation business plan is used to attract

capital

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An entrepreneur should:Make sure the plan has an attractive coverRid your plan of all spelling and grammatical errors Make the plan visually appealing Include a table of contents to allow readers to navigate

the plan easily Make it interesting!Use spreadsheets to generate financial forecastsAlways include cash flow projections Keep your plan “crisp” – long enough, but not too longTell the truth – always

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The five Cs of credit:1. Capital2. Capacity3. Collateral4. Character5. Conditions

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A business plan presentation should cover five basic areas:1. Your company and its product or services2. The problem to be solved – use a compelling

story3. A description of your solution to the problem4. Your company’s business model5. Your company’s competitive edge

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A business plan presentation should cover five basic areas:1. Your company and its product or services2. The problem to be solved – use a compelling

story3. A description of your solution to the problem4. Your company’s business model5. Your company’s competitive edge

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When making the presentation:1. Prepare2. Practice your delivery and then practice some more3. Demonstrate enthusiasm about the business but don’t be

overemotional4. Focus on communicating the dynamic opportunity your

idea offers and how you plan to capitalize on it5. Hook investors quickly with an up-front explanation of the

new venture, its opportunities, and the anticipated benefits to them

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6. Use visual aids7. Follow Guy Kawasaki’s 10/20/30 rule for PowerPoint

presentations8. Explain how your company’s products or services solve some

problem and emphasize the factors that make your company unique

9. Offer proof10.Hit the highlights11. Keep the presentation “crisp” just like your business plan

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12.Avoid the use of technical terms 13.Remember to answer the question “What’s in it for me?”14.Close by reinforcing the potential of the opportunity15.Be prepared for questions16.Anticipate the questions the audience is most likely to

ask and prepare for them in advance17.Be sensitive to the issues that are most important to

lenders and investors by reading the pattern of their questions

18.Follow up with each potential investor

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Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 8-1.

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