This Document Contains Chapters 5 to 8 Chapter 5 Industry Analysis Key Words Industry—a group of firms producing a similar product or service, such as airplanes, music, electronic games, or fitness club memberships Target market—the limited portion of an industry that a firm goes after or tries to appeal to at a certain point in time NAICS Code—(replaced the older SIC system in 1997) a two- through six-digit hierarchical classification code system that identifies the industry that a company operates in (e.g. 713950 for the fitness center industry) Industry structure—how concentrated or fragmented the industry is and whether the industry’s competitive landscape is in general attractive or unattractive Concentrated vs. fragmented industries—a concentrated industry is dominated by a few large firms, whereas a fragmented industry includes a large number of smaller companies Bifurcated industries—industries where most successful companies serve either the top end of the market (in terms of quality of goods and price range) or the bottom end, and companies would struggle to be successful trying to serve the middle. Chapter Overview This chapter introduces and describes the industry analysis portion of the business plan. It’s important that this section focus strictly on a firm’s industry rather than its industry and its target market simultaneously. Chapter Summary 1. An industry is a group of firms producing a similar product or service, such as airplanes, music, electronic games, or fitness club memberships. 2. The reason it’s important to separate the analysis of a firm’s industry and its target market is that it’s premature for a new firm to select, or even talk about, a specific target market until an understanding of the broader industry is obtained. 3. It’s important that the industry analysis appear early in a business plan, because it logically precedes the analysis of a firm’s target market and its marketing strategy. It also helps set up and support the remainder of the plan. 4. The major sections of an industry analysis include: industry definition, industry size, growth, and sales projections; industry characteristics; industry trends; and long-term prospects. 5. If your firm operates in two or more industries, you should identify all the industries that it participates in and recognize that it will be necessary to conduct an industry analysis for each of the industries. Some discretion is allowed regarding the weight placed on the individual analyses. In some instances, when a firm operates in more than one industry, it may be appropriate to conduct a full analysis on the primary industry that firm operates in and an abbreviated analysis on the other. 6. The key to the industry size, growth, and sales projections portion of the analysis is to not just report the numbers. The key is to make sense of the numbers and present them in a way that builds the credibility of your business plan. 7. The four key issues to deal with in the industry characteristics section of the analysis are industry structure, the nature of the participants in an industry, key ratios, and the industry’s key success factors. 8. The topic of industry structure is particularly important. An industry’s size and its growth rate, regardless of how positive they are, are basically moot points if an industry isn’t structurally attractive for a start-up. 9. The industry trends portion of an industry analysis is arguably the most important section because it often lays the foundation for a new business idea in an industry, and it typically provides the justification for claims made earlier in the industry analysis. 10. The industry analysis should conclude with a brief statement of your beliefs regarding the long-term prospects for the industry. Chapter Outline I. Introduction II. Industry Definition III. Industry Size, Growth Rate, and Sales Projections a. Industry Size b. Industry Growth Rate c. Industry Sales Projections IV. Industry Characteristics a. Industry Structure b. Nature of Participants c. Ratios d. Key Success Factors V. Industry Trends a. Environmental Trends b. Business Trends VI. Long-term Prospects VII. How the Industry Analysis Affects and Is Affected by Other Sections of the Plan Chapter Notes I. Introduction • An industry is a group of firms producing a similar product or service • Industries vary along many dimensions, including size, growth rate, structure, financial characteristics, and overall attractiveness • The trends affecting an industry also matter • It is important that the industry analysis section of your business plan focus strictly on the firm’s industry rather than the industry and the target market simultaneously ○ A target market is the limited portion of an industry that a firm goes after or tries to appeal to at a certain point in time • It’s premature for a new firm to discuss a specific target market until an understanding of the broader industry is obtained • The industry analysis should appear early in the business plan because it logically precedes the analysis of a firm’s target market and marketing strategy II. Industry Definition • Briefly (no more than several sentences) describe the firm’s industry: ○ The industry’s SIC code and NAICS code should be provided • A firm’s industry can be defined narrowly or broadly (e.g., JetBlue can be defined as in the airline industry or in the transportation industry) • The definition determines the scope of the firm’s overall sphere of concern • If your firm operates in two or more industries, you should identify all the industries that it participates in • It may be difficult to identify an industry that matches an innovative new product or service ○ In the case of an innovative product or service, improvise by selecting industries that represent the closest fit, and then include additional pertinent information ○ The advantage of this approach is that your analysis is anchored in established NAICS categories, which provide you with plentiful information ○ If you create a new definition that is more precise, it may be more difficult to accumulate good-quality information for your industry analysis III. Industry Size, Growth Rate, and Sales Projections • This section discusses the size (in dollars), the growth rate (in percent), and the future sales projections for the industry or industries our firm will be entering • The key is to make sense of the numbers and present them in a way that builds the credibility of your business plan • There are four general rules of thumb for completing this section: ○ Always display financial information, such as industry sales and growth rate, in a multiyear format, making it easy to spot trends ○ Display your information graphically if possible ○ Provide information about your industry on a regional or local basis if appropriate ○ Avoid the temptation to report only positive or flattering information about your industry a. Industry Size ○ Industry size is normally displayed in dollars over a three- to five-year period ○ The ideal size for a start-up is large enough to allow different competitors to serve different segments profitably but small enough that it isn’t attracting the immediate attention of larger potential competitors ○ If your industry is broken down into easily identifiable segments, it may be appropriate to report the share (in percentage) of each segment ○ Some plans also report the contribution that a specific industry makes to its larger industry sector b. Industry Growth Rate ○ An industry’s growth rate should be reported on a percentage basis along with an interpretation of what the numbers mean ○ Some plans comment on how the industry growth rate compares to similar industries ○ If you are defining an industry that isn’t being actively tracked by a reliable source, finding good sales data will require creativity and persistence c. Industry Sales Projections ○ This section should report sales projections for your industry ○ You can quote from established sources, but do so sparingly; readers will want to know how you have interpreted the data ○ Include concrete numbers for what you think your industry’s sales and sales growth rate will be for the next one to three years IV. Industry Characteristics • This section talks about the structure of your industry and lays out its competitive landscape • The four key issues to deal with are: industry structure, the nature of the participants in an industry, key ratios, and the industry’s key success factors a. Industry Structure ○ Industry structure refers to how concentrated or fragmented the industry is and whether the industry’s competitive landscape is generally attractive or unattractive ○ Report on how concentrated or fragmented your industry is • Concentrated industries are dominated by a few large firms • Fragmented industries include a large number of smaller companies • Normally, an industry is concentrated if large capital investments are required to participate, or if it has matured and consolidation has taken place • An industry is typically fragmented if it’s in the emergence stage of its life cycle and/or the cost of entry is relatively low • Most firms launch into a fragmented industry; no explanation need be made about this approach • If you plan to launch into a concentrated industry, you will need to explain how you plan to compete • Some firms compete in concentrated industries by identifying a niche that is less expensive to compete in, or by using innovation to lower the cost to enter the industry ○ You will also need to report on the general attractiveness of an industry’s competitive landscape ○ Attractiveness can be evaluated using Michael Porter’s “five forces” model: • Relatively high barriers of entry to keep out competition • Not enough rivalry to create cutthroat competition • No good substitutes for the basic product or service • Limited power of suppliers to negotiate input prices up • Limited power of buyers to force selling prices down ○ Comment on the most salient of the “five forces” in your business plan b. Nature of Participants ○ In this brief section, you will provide your reader with a “feel” for the nature and mixture of firms in your industry ○ You want your reader to visualize how your firm will fit in or see the gap that your firm will fill ○ You should also discuss how the industry is segmented ○ If you know which segment is growing the fastest and/or is the most profitable, that’s good information to convey ○ Some industries have clearly bifurcated, with the most successful companies serving either the top end of the market or the bottom end ○ The worst place to be, in bifurcated industries, is right in the middle c. Ratios ○ Report an industry’s key financial ratios and other ratios of interest ○ This information provides a point of reference to compare a company’s financial and non-financial projections against d. Key Success Factors ○ Key success factors define what an organization in the industry has to be good at to be successful ○ Most industries have 6 to 10 key factors ○ Most successful firms are competent in all their industry’s key factors and differentiate themselves by excelling in two or three areas V. Industry Trends • This is arguably the most important section of an industry analysis because it often lays the foundation for a new business idea in an industry • The two types of trends that are the most important to focus on are environmental trends and business trends a. Environmental Trends ○ The most important environmental trends are economic trends, social trends, technological advances, and political and regulatory changes ○ Some industries experience slow or no growth for years, and then experience sudden upswings in growth as environmental change turns in favor of the industry b. Business Trends ○ Other trends impact industries that aren’t environmental trends per se, but are important to mention ○ You can’t cover every possible fact affecting an industry, but you should mention the major trends VI. Long-term Prospects • The industry analysis should conclude with a brief statement of your beliefs regarding the long-term prospects for the industry • No new information should be provided at this point; rather draw from the preceding sections of the industry analysis to support your conclusions VII. How the Industry Analysis Affects and Is Affected by Other Sections of the Plan • Industry analysis is a foundational aspect of evaluating the merits of a prospective business venture • A careful analysis of a firm’s industry lays out what is realistically possible and what isn’t realistically possible for a start-up to achieve • Most start-ups are constrained enough by their industries that their performance falls in line with what you would expect after reading their industry analysis • The industry analysis affects other sections of the business plan because it is a point of reference to work from • It helps temper the enthusiasm of business plan writers and provides a useful reference for a plan’s readers Chapter 6 Market Analysis Key Words Market analysis—breaks the industry into segments and zeroes in on the specific segment (or target market) that the firm will tackle High-involvement purchase—a purchase for which the buyer is prepared to spend a considerable amount of time and effort searching Low-involvement purchase—a purchase that a buyer makes with a minimum of thought because it does not have much impact on his or her life Direct competitors—businesses that offer a product that is very similar to yours Indirect competitors—competitors that offer close substitutes to the product that you will be offering. Future competitors—companies that are not yet direct or indirect competitors but could move into one of these roles at any time Competitive intelligence—the process of gathering information about your competitors Chapter Overview This chapter introduces the market analysis portion of the business plan. Be aware that this section is distinct from the marketing section, which will be discussed in Chapter 7. In the market analysis section, we will focus on the firm’s target market, customers, and competitors, how it will compete in the marketplace, and potential sales and market share. Chapter Summary 1 The marketing analysis section of a business plan is distinctly different from the marketing section. The market analysis section focuses on describing a firm’s target market, customers, and competitors; how it will compete in the marketplace; and potential sales and market share. In contrast, the marketing section focuses on the classic marketing functions, including product, price, promotion, and distribution. 2 The market analysis is an extremely important section of a business plan for two reasons. First, it helps define the nature of the business and the remainder of the plan. Second, it affirms that a company has a well-thought-out target market, understands its customers, and can generate sales in the face of competition. 3 Market segmentation is the process of dividing a market into distinct subsets (or segments) that behave in the same way or have similar needs. An exciting element of the entrepreneurial process is that it often results in the identification of new segments of an industry that weren’t previously considered. 4 After a firm segments its market, it selects a segment within the market to target. The biggest mistake that people make when selecting a target market is to define their market too broadly or to try to target more than one segment simultaneously. Startups are usually best served by zeroing in on a specific target market. 5 Estimating the size of a target market can be a tricky proposition. The first rule of thumb is to not make frivolous predictions. The key is to explain the path that leads you to your conclusions. If you are producing a product that is an enhanced version of something that is already available, the numbers will be fairly easy to get. Estimating the size of a target market for a market that doesn’t exist is harder. 6 It’s important to include a section in the market analysis that deals directly with the behavior of the consumers in a firm’s target market. The more a startup knows about the consumers in its target market, the more it can gear products or services to accommodate their needs. 7 A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to gain a competitive advantage in one or more areas. 8 A firm’s competitors include direct competitors, indirect competitors, and future competitors. 9 A competitive analysis grid is a tool for organizing and presenting the information you collect about your competitors. 10 There are four basic ways for a firm to estimate its initial sales: contacting trade associations, finding comparable firms, finding sales estimates for comparable firms in magazine and newspaper articles, and using the multiplication method. Chapter Outline I. Introduction II. Market Segmentation and Target Market Selection a. Market Segmentation b. Selecting a Target Market c. Target Market Size and Trends III. Buyer Behavior IV. Competitor Analysis a. Identification of Direct, Indirect, and Future Competitors b. Competitive Analysis Grid V. Estimate of Annual Sales and Market Share Chapter Notes I. Introduction • Market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) that the firm will tackle • The market analysis section of a business plan is distinctly different from the marketing section • The market analysis section focuses on describing a firm’s target market, customers, and competitors, how it will compete in the marketplace, and potential sales and market share • The market analysis is an extremely important section of a business plan for two reasons: ○ The market analysis helps define the nature of the business and the remainder of the plan ○ It affirms that a company has a well-thought-out target market, understands its customers, and can generate sales in the face of competition • To raise investment capital, a firm must demonstrate that its target market has sufficient potential to enable it to rapidly increase sales and return to its investors an amount that is 5 to 20 times the original investment • Gaining this degree of insight and knowledge generally requires entrepreneurs to conduct both primary and secondary research II. Market Segmentation and Target Market Selection • A firm must answer the basic question, “Who are our customers, and how will we appeal to them?” • In some cases, a firm will have two markets, and you should describe the characteristics of both markets a. Market Segmentation ○ Market segmentation is the process of dividing a market into distinct subsets (or segments) that behave in the same way or have similar needs ○ Markets can be segmented in many ways, such as by geography (city, state, country), demographic variables (age, gender, family size, income), psychographic variables (personality, lifestyle, values), behavioral variables (benefits sought, product usage rate, brand loyalty), and product type (varies by product) ○ There are requirements for successful market segmentation: • Homogeneity of needs and wants within the segment • Heterogeneity of needs and wants among segments • Differences within the segment are small compared to differences across segments • The segment is distinct enough that its members can be easily identified • It should be possible to determine the size of the segment • The segment should be large enough to be profitable ○ IBISWorld and Mintel provide suggestions for segmenting the industries that they follow ○ The entrepreneurial process often results in the identification of new segments of an industry that weren’t previously considered b. Selecting a Target Market ○ After a firm segments its market, it selects a segment within the market to target ○ A big mistake is to define the target market too broadly or to try to target more than one segment simultaneously ○ Focusing intently on a single market allows a firm to become an expert in a specialized area rather than trying to spread itself too thin ○ A firm should assess the size of the market to make sure it is large and healthy enough to meet the firm’s objectives c. Target Market Size and Trends ○ Estimating the size of a target market can be tricky; in many cases, you must literally invent a methodology for making an estimate ○ The key is to explain the path that led to your conclusions ○ If you are producing an enhanced version of something that is already available, numbers will be fairly easy to get ○ Estimating the size of a target market for a market that doesn’t currently exist, or a market that is specific to a particular location or geographic area, is harder ○ Readers will normally judge projections based on (1) the reasonableness of the assumptions made, (2) the degree to which the numbers are anchored in facts, and (3) the extent to which it appears that a good faith effort was made to be as accurate as possible ○ The best recourse, if you are stuck, is to talk with a reference librarian to see if there are additional information resources; editors of industry-specific trade journals and directors of trade associations are also good sources of information ○ This section should also comment on industry trends that have the potential to affect the target market positively or negatively III. Buyer Behavior • It’s important to include a section that deals directly with the behavior of the consumers in a firm’s target market • In many business-to-business start-ups, it’s important to discern specifically who the “decision makers” are in the businesses you’ll be trying to sell to • The length of a customer’s buying process is often an important concern ○ A high-involvement purchase is one for which the buyer is prepared to spend a considerable amount of time and effort searching ○ A low-involvement purchase is one that a buyer makes with minimum thought because it does not have much impact on his or her life IV. Competitor Analysis • A competitor analysis is a detailed analysis of a firm’s competition • It helps a firm understand the positions of its major competitors and the opportunities that are available • You should never say that you don’t have any competitors a. Identification of Direct, Indirect, and Future Competitors ○ The first step in a competitor analysis is determining who the competition is ○ You should list a handful of competitors from each category comprising your direct competitors, indirect competitors, and future competitors: • Direct competitors—businesses that offer a product that is very similar to yours, targeting the same customers that you are • Indirect competitors—offer close substitutes to the product you will be offering, targeting the same basic need that will be met by your product • Future competitors—companies that are not yet direct or indirect competitors but could move into one of these roles at any time ○ You should provide a short assessment of the scope and intensity of your competition ○ The next section focuses on your competitive analysis grid, which compares your firm to your major competitors ○ The competitive analysis grid will require you to engage in competitive intelligence, which is the process of gathering information about your competitors b. Competitive Analysis Grid ○ A competitive analysis grid is a tool for organizing and presenting the information you collect about your competitors • Show the key success factors for firms in your target market on the vertical axis of the grid, and then show your firm along with your four or five major direct competitors on the horizontal axis • In each box, rate yourself relative to your competitors on each of key success factors ○ Completing the competitive analysis grid may reveal that you’re at a disadvantage over your competitors and help you make adjustments V. Estimate of Annual Sales and Market Share • The final section of the market analysis focuses on computing an estimate of your firm’s initial annual sales and market share • There are four basic ways for a new firm to estimate its initial sales: ○ Contact the premier trade associations in your industry and ask if they track sales numbers for businesses that are similar to the business you plan to start ○ Find a comparable firm, or a company that sells a comparable product ○ Conduct Internet searches to try to find magazine and newspaper articles that focus on firms in your industry ○ Use a multiplication method to try to arrive at a reasonable number • Sometimes the multiplication method gets fairly complicated, requiring that you consider several industries and conduct primary research to get a good estimate • The ideal scenario for start-ups is to use all four methods of estimating initial sales, and then compare estimates Chapter 7 Marketing Plan Key Words Marketing strategy—refers to a firm’s approach to marketing its products and services stated in broad terms Position—concerned with how a firm is situated relative to its rivals (or potential rivals) Product attribute map—created by articulating two of a product’s most important attributes, one on the x-axis and the other on the y-axis Cost-based pricing—list price is determined by adding a mark-up percentage to a product’s cost Value-based pricing—list price is determined by estimating what consumers are willing to pay for a product, and then backing off a bit to provide a cushion Gross margin—a company’s net sales minus its cost of goods sold Price-quality attribution—consumers naturally assume that the high-priced product is also the better quality product Sales process (or cycle)—refers to the steps the firm goes through to establish relationships with customers and close sales Advertising—making people aware of a product in hopes of persuading them to buy it Buzz—word-of-mouth advertising for a product or service; creating awareness and a sense of anticipation about a company and its offerings Distribution—encompasses all the activities that move a firm’s product from its place of origin to the consumer Channel conflict—when a business sells online (capturing all the profits itself) and also wants retailers to sell its products through its stores. Chapter Overview This chapter builds on Chapter 6, which discussed the market analysis by introducing the marketing plan portion of the business plan. This chapter focuses on how the firm will actually find customers and close sales. It also deals with the nuts and bolts of marketing in terms of price, promotion, distribution, and sales. Chapter Summary 1. The best way to describe a company’s marketing plan is to start by articulating its marketing strategy, its' positioning, and its' points of differentiation, and then talk about how these overall aspects of its plan will be supported by its price, its promotional mix and sales process, and its distribution strategy. If you haven’t discussed your product yet, it should be talked about here. 2. There are two things to be particularly mindful of as you write the marketing section of your business plan. First, all the elements of a firm’s marketing plan should be developed with the customer plainly in mind. Second, you must detail exactly who will sell your product or service. 3. This marketing section of the business plan contains four subsections: overall marketing strategy, pricing strategy, sales process and promotions mix, and distribution and sales. 4. A firm’s marketing strategy is its approach to marketing its products or services stated in broad terms, which forms the basis of all of its marketing-related activities. 5. After selecting a target market, the next step is for a firm to select a “position” in the market. Position is concerned with how a firm is situated relative to its rivals. In a sense, a position is a part of a market or a specific target market that a firm is claiming for its own. 6. Price is an important issue because it determines how much money a company can earn. The price a company charges for its products also sends a clear message to its target customers. 7. The two methods for determining the price of a product or service are cost-based and value-based pricing. In cost-based pricing, the list price is determined by adding a markup percentage to a product’s cost. In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product, and then backing off a bit to provide a cushion. Most experts recommend value-based pricing because it hinges on the perceived value of a product or service rather than cost-plus markup, which is a formula that ignores the customer. 8. A firm’s sales process (or cycle) refers to the steps it goes through to establish relationships with customers and close sales. 9. Advertising is making people aware of a product in hopes of persuading them to buy it. The major difference between public relations and advertising is that public relations isn’t paid for. As a result, many start-ups emphasize public relations over advertising because it’s free and it helps build the firm’s credibility. 10. One issue that is particularly important in executing a promotions plan is to focus on the benefits of a product or service rather than the features. 11. Distribution encompasses all the activities that move a firm’s product from its place of origin to the consumer. Chapter Outline I. Introduction II. Overall Marketing Strategy a. Positioning Strategy b. Points of Differentiation III. Pricing Strategy a. Cost-Based Pricing vs. Value-Based Pricing b. Other Pricing-Related Issues IV. Sales Process and Promotions Mix a. Sales Process b. Promotions Mix i. Advertising ii. Public Relations iii. Social Media iv. Other Promotions-Related Activities V. Distribution and Sales a. Distribution and Sales Alternatives b. Sales Strategy and Related Issues Chapter Notes I. Introduction • This chapter focuses on how the firm will actually find customers and close sales • It deals with the nuts and bolts of marketing in terms of price, promotions, distribution, and sales • Describe a company’s marketing plan by articulating its marketing strategy, positioning, and points of differentiation and how they will be supported by price, promotional mix, and sales process and distribution strategy • The marketing section of the business plan must lay out specifically how you plan to make your target market aware of the existence of your product or service • Reinforce how your product provides its user unique value and differs from similar products in the marketplace • There are two things to be mindful of as you write this section: ○ The elements of a firm’s marketing plan should be developed with the customer plainly in mind ○ You must detail exactly who will sell your product and how your sales process will work • Describe your sales process and the methods that you’ll use to sell your product (e.g., via direct sales force, through distributors or wholesalers, through an alliance with companies that sell complementary products, or through some other means) II. Overall Marketing Strategy • Marketing strategy refers to a firm’s approach to marketing its products and services in broad terms, which forms the basis of all its marketing-related activities • Begin the marketing plan section by articulating your marketing strategy because it sets the tone for the entire section • Another important reason for having a marketing strategy and for articulating it in a business plan is to make sure that a firm’s marketing efforts are consistent with its overall mission and understanding of the market a. Positioning Strategy ○ After selecting a target market, the next step is for a firm to select a “position” in the market ○ Position is concerned with how a firm is situated relative to its rivals (or potential rivals) ○ Determining which position to occupy and compete in is simply a judgment call on the part of a company based on its mission, its overall approach to the marketplace, and its competitive landscape b. Points of Differentiation ○ You should also clearly articulate your specific points of differentiation early in the marketing plan section of your business plan ○ It’s typically best to limit the points of differentiation that you talk about to two or three points, to make them memorable and distinct ○ Make sure your points of differentiation aren’t liabilities, if a discerning reader starts playing devil’s advocate ○ The most compelling forms of differentiation are created through innovations that are difficult to imitate because they are created by competencies unique to a firm ○ A useful way for a start-up to visually depict its primary point of differentiation is through a product attribute map • A product attribute map is created by articulating two of a product’s most important attributes, one on the x-axis and the other on the y-axis III. Pricing Strategy • This section should explain how you plan to price your product or service • The price a company charges for its products also sends a clear message to its target customers • State how you plan to price your product or services and provide a brief rationale for your pricing philosophy a. Cost-Based Pricing vs. Value-Based Pricing ○ The two methods for determining the price of a product or service are cost-based pricing and value-based pricing: • In cost-based pricing, the list price is determined by adding a markup percentage to a product’s cost • The advantage of this method is that it’s straightforward and easy to justify • The disadvantage is that it’s not always easy to estimate what the costs of a product will be, particularly for a start-up • Companies are also finding it increasingly difficult to dictate prices to customers given customers’ ability to comparison shop on the Internet to find what they believe is the best price • In value-based pricing, the list price is determined by estimating what consumers are willing to pay for a product and then backing off a bit to provide a cushion • Sometimes, to make this determination, a company has to conduct focus groups or try different pricing options in test markets ○ Most experts recommend value-based pricing because it hinges on the perceived value of a product or service rather than cost-based pricing, which ignores the customer ○ Value-based pricing also frequently produces a higher gross margin (a company’s net sales minus cost of goods sold) b. Other Pricing-Related Issues ○ Most experts warn start-ups to resist the temptation to charge a low price for their products in hopes of capturing market share ○ Most consumers make a price-quality attribution, naturally assuming that the higher-price product is also the better quality product ○ The price you’re able to charge is largely a function of: (1) the objective quality of your product or service and (2) the perception of value that you create in the minds of your customers relative to competing products in the marketplace IV. Sales Process and Promotions Mix • A firm’s sales process (or cycle) depicts the steps it goes through to identify prospects and close sales • Promotions mix refers to the specific tactics it uses, such as advertising and public relations, to support the sales process and enhance its overall brand • Sales and promotions is one area where hard work and ingenuity can make up for a lack of funds • Money can also be easily wasted if the sales process is not carefully thought through and executed a. Sales Process ○ Sales process (or cycle) varies by firm, but normally includes the following steps: 1. Prospect for (or gather) sales leads 2. Make the initial contact 3. Qualify the lead 4. Make the sales presentation 5. Meet objections and concerns 6. Close the sale 7. Follow up ○ Following a structured process to generate and close sales benefits a firm in two ways: (1) it enables a firm to fine-tune its approach to sales and build uniformity into the process and (2) it helps a firm qualify leads, so the firm can spend its time and money pursuing the most likely buyers b. Promotions Mix ○ Promotions mix includes the specific tactics that a firm uses to communicate with potential customers including advertising, public relations, and other promotions-related activities i. Advertising • Advertising is making people aware of a product in hopes of persuading them to buy it • The major goals of advertising are to raise customer awareness of a product, explain a product’s comparative features and benefits, and create an association between a product and a certain lifestyle (or a certain objective in a business-to-business context) • Media include direct mail, magazines, newspapers, radio, the Internet, television, and billboard advertising • Media used normally depends on the firm’s target market • There are many downsides to conventional forms of advertising, which steers start-ups away from advertising on a broad basis: • Low credibility • Possibility that high percentage of viewers will not be interested • Message clutter • Relative costliness • Perception that advertising is intrusive • Possibility that poorly crafted ads run risk of irking target market • Most start-ups tend to be selective in advertising efforts, such as limiting their print ads to industry trade journals or using focused pay-per-click ii. Public Relations • Public relations refers to efforts to establish and maintain a company’s image with the public • The major difference between public relations and advertising is that public relations isn’t paid for • Examples of public relations techniques include: • Press releases • Media coverage • Articles about the firm in newspapers, magazines, or industry press • Blogging • Monthly newsletters • Civic, social, and community involvement • Generating favorable public relations is better than advertising because it is more grassroots and doesn’t seem to be as self-serving • The key to getting media coverage is to have a story to tell, rather than simply extolling the value of your product or service iii. Social Media • Social media consists primarily of blogging and establishing a presence and connecting with customers though sites like Twitter, Facebook, and Google+. • The number one rule is to determine if a business’s target market are active social media users. • The largest group of social media users for men is in the 45-54-year age group and for women in the 25-34-years age group. iv. Other Promotions-Related Activities • Some firms give away free samples or trial memberships as a way of exposing potential customers to their product or service • This type of initiative is often pursued to create “buzz” or word-of-mouth advertising • Buzz means creating awareness and a sense of anticipation about a company • In most cases, putting together a specific budget for promotional activities is helpful V. Distribution and Sales • Distribution encompasses all the activities that move a firm’s product from its place of origin to the consumer • This section of your business plan clearly identifies your distribution and sales plan in terms of who will make the sales a. Distribution and Sales Alternatives ○ The first step in determining a distribution and sales strategy is to sort through the choices ○ The key to making the right choices among the alternatives is to think carefully about where people in your target market shop, and then about the most effective and economical ways to get your products in these outlets ○ Selecting the manner to distribute and sell a product or service is not a trivial issue; this critical issue lies at the heart of a firm’s overall marketing plan and its ability to effectively reach its target market b. Sales Strategy and Related Issues ○ Your description should make it clear whether you plan to field your own sales force ○ Describe how many salespeople you will initially need, how their numbers will be ramped up as your company grows, and how they will be compensated ○ If distributing via intermediaries, describe how they will be chosen, and the ways in which the intermediaries will interface with the sales outlets in your industry ○ One way a new firm can innovate and provide unique value in the marketplace is via distribution and sales Chapter 8 Management Team and Company Structure Key Words Options pool—an inventory of company stock, usually around 15 to 20 percent of the total stock, which is set aside for future employees Board of directors—a panel of individuals elected by a corporation’s shareholders to oversee the management of the firm Inside director—a member of the board of directors who is also an officer of the firm Outside director—a member of the board of directors who is not employed by the firm Signaling—when a high-quality individual agrees to serve on a board of a new firm, the individual is in essence indicating or “signaling” that the company has the potential to be successful Board of advisors—a panel of experts asked by a firm’s managers to provide counsel and advice on an ongoing basis Consultant—an individual who gives professional or expert advice Organizational chart—a graphic representation of how authority and responsibility are distributed within a company Chapter Overview This chapter describes a start-up’s management team and company structure. This part of the business plan is divided into five sections: management team, board of directors, board of advisors, other professionals, and company structure. Chapter Summary 1. The management team and company structure section is pivotal in a business plan. Many investors and others who read business plans look first at the executive summary, and then go directly to the management team section to assess the strengths of the people who will be starting the firm. 2. There are two issues that you should be particularly sensitive to as you write the management team and company structure section of your business plan. First, the way your management team is assembled provides an indication of the extent to which you’re open to advice and are able to generate enthusiasm for your firm. Second, as you write the management team section of your business plan you should clearly describe how the management team will evolve. 3. There are three major parts to the management team portion of this section of the business plan: management team personnel, management team ownership and compensation, and common mistakes to avoid. 4. A good way to describe the gaps that exist in a management team is to develop a management team skill profile. 5. You must fully disclose the ownership structure of the new venture and the compensation of the members of the management team in the business plan. A table that shows the names of each of the owners of the firm, along with their age, their percent ownership in the company, and their compensation if they work for the firm is the best method. 6. There are a set of common mistakes to avoid when putting together your initial management team and writing your business plan. These common mistakes include placing unqualified friends or family members in key management positions, assuming that previous success in other industries automatically translates to your industry, presenting a “one-man team” philosophy, hiring top managers who share no ownership in the firm, not disclosing management team skill or competency gaps, and having vague or unclear plans for filling the skill or competency gaps that are disclosed or clearly exist. 7. A board of directors is a panel of individuals who are elected by a corporation’s shareholders to oversee the management of the firm. Many firms have active boards of directors that provide guidance and lend legitimacy to the firm. 8. An advisory board is a panel of experts who are asked by a firm’s managers to provide counsel and advice on an ongoing basis. 9. At times, professionals, such as attorneys, bankers, investors, and consultants, assume important roles in a new venture’s success. These individuals and firms should be identified and included as part of a firm’s overall management team in its business plan. 10. The most effective way to illustrate how a company will be structured and the lines of authority and accountability that will be in place is to include an organizational chart in the business plan. Chapter Outline I. Introduction II. Management Team a. Management Team Personnel b. Management Team Ownership and Compensation c. Common Mistakes to Avoid III. Board of Directors a. Provide Guidance b. Lend Legitimacy IV. Board of Advisors V. Other Professionals VI. Company Structure Chapter Notes I. Introduction • Many investors and others look first at the executive summary, and then go directly to the management team section to assess the strength of the people starting the firm • There is a prevalent belief that unless a proposed new venture has a strong management team, little else matters • It’s often not the idea or market that wins funding among competing plans, but the perception that one management team is better prepared to execute their idea than the others • Investors tend to evaluate management teams in the context of the type of business they’re proposing and the type of funding or financing they’re seeking • The best candidate for investment resides in Box 2 of the 2 x 2 matrix—an untested idea and a tested management team • The management team section should be crisp and to the point, with material such as resumes of key employees placed in an appendix • The way your management team is assembled provides an indication of the extent to which you’re open to advice and you’re able to generate enthusiasm for your firm • Clearly describe how your team will evolve; most new ventures will have gaps in their management teams at the business plan stage • Describe where the gaps are and how they’ll be filled; for example, if the start-up can’t afford to hire a marketing person during its product development state, that’s understandable, but evidence should be provided showing where the firm is getting access to marketing expertise • Leaving issues like these unaddressed or unresolved gives the impression that the founders don’t really know what they’re doing and erodes credibility II. Management Team • The management team of a new firm typically consists of the founder and a handful of key management personnel • The description should be largely factual but should be presented in a way that makes it easy to visualize where the firm is today and where it plans to be in the foreseeable future in regard to key management team personnel • Indicate the name or names of the founders, how many employees the company has, where the major gaps are, and how quickly the company will be adding personnel • The three major parts to this section are management team personnel, management team ownership and compensation, and common mistakes to avoid a. Management Team Personnel ○ A brief profile of each member of the management team should be provided starting with the founder or founders • Title of the position • Duties and responsibilities of the position • Previous industry and related experience • Previous successes • Education background ○ Certain attributes of a management team should also be highlighted if they apply in your case • Team members who’ve worked together before are preferred because it usually means that they get along personally and trust one another • The skills and ability of the members of the team should complement one another rather than reinforce a single skill or competency • The next step in describing the management team is to identify gaps that exist • Complete a management team skill profile grid, indicating which skills are satisfied by each management team member • The grid illustrates the skills or competencies that currently have no coverage and roughly the number of people who need to be hired b. Management Team Ownership and Compensation ○ You must also fully disclose the ownership structure of the new venture and the compensation of the members of the management team ○ List each owner, his percent ownership in the company, and his base compensation ○ An options pool is an inventory of company stock that is set aside for future employees ○ Attracting high-quality people to a start-up often necessitates the granting of stock options as an incentive form of compensation ○ Finally, it should be clear how the money for the firm has been raised so far c. Common Mistakes to Avoid ○ Do not place unqualified friends or family members in key management positions ○ Don’t assume that previous success in other industries automatically translates to your industry ○ Don’t adopt a “one-man team” philosophy ○ Don’t hire top managers who share no ownership in the firm ○ Be sure to disclose management team skill or competency gaps ○ Don’t use vague or unclear language to discuss plans for filling the skill or competency gaps that are disclosed III. Board of Directors • If a new venture organizes as a corporation, it is legally required to have a board of directors, which is a panel of individuals elected by the corporation’s shareholders to oversee the management of the firm • Technically a board of directors has three responsibilities: (1) appoint the firm’s officers, (2) declare dividends, and (3) oversee the affairs of the corporation • An inside director is a person who is also an officer of the firm • An outside director is someone who is not employed by the firm • If you include this section in your plan, you should list your board members and provide a brief bio for each member a. Provide Guidance ○ Providing guidance and support to the managers of the firm is the most useful role of the board of directors ○ Boards can also help fill competency gaps within the company ○ If a firm gets investment capital, the investor will normally occupy a seat on its board of directors b. Lend Legitimacy ○ Providing legitimacy for a firm is another important function of a board of directors ○ It is assumed that a high-quality individual would be reluctant to serve on a board of a low-quality firm; this individual’s presence on the board is known as “signaling” that the company has the potential to be successful ○ Investors like to see management teams, including the board of directors, that have people with enough clout to get their foot in the door with potential suppliers and customers ○ If a company doesn’t currently have a board of directors, it may be prudent to indicate that the firm anticipates having a board of directors at some point in the future IV. Board of Advisors • A board of advisors is a panel of experts asked by a firm’s managers to provide counsel and advice on an ongoing basis • Many people are more willing to serve on a board of advisors than on a board of directors because it requires less time and no legal liability is involved • Most boards of advisors have between 5 and 15 members • Having a board of advisors can make your start-up stand out because, although having a board of advisors is widely recommended, most start-ups do not have one V. Other Professionals • At times other professionals, such as attorneys, bankers, investors, and business consultants, assume important roles in a new venture’s success • The objective is not only to disclose who you’re working with but also to assure the readers of your plan that you’re getting good-quality advice • Consultants, individuals who give professional or expert advice, make up an important source of advice for many start-up firms • Unpaid consultants include organizations such as the Small Business Development Center and SCORE • Some start-ups use the services of consulting companies such as Bain & Company and Accenture, but usually on a limited basis VI. Company Structure • Even if you are a small firm, you should outline how the company is currently structured and how it will be structured as it grows • Company structure is a “nuts-and-bolts” type of issue that deals with the inner workings of a firm • The most effective way to illustrate a company’s structure and lines of authority and accountability is to include an organizational chart in the plan • An organizational chart is a graphic representation of how authority and responsibility are distributed within the company • Companies are generally organized along functional, product, or geographical lines • There may be some unfilled boxes on the organizational chart, consistent with the “ghaps” in management personnel shown in the skill profile • If your firm has more than one founder, you should comment on the specific role that each founder will take on as the firm moves forward • Some business plans complement their discussion of company structure with a brief analysis of how the firm will be managed from a leadership, motivation, and corporate culture point of view Instructor Manual for Preparing Effective Business Plans: An Entrepreneurial Approach Bruce R. Barringer 9780133506976, 9781292039916, 9780132318327
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