This Document Contains Chapters 6 to 11 Chapter 6 Market Analysis Review Questions 1. Explain the purpose of the market analysis section of a business plan. Answer: 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. 2. Describe the difference between the market analysis section and the marketing plan section of a business plan. Answer: The marketing analysis section of a business plan is distinctly different than the marketing section. The market analysis section focuses on describing a firm’s target market, its customers, its competitors, how it will compete in the marketplace, and its potential sales and market share. In contrast, the marketing section focuses on the classic marketing functions, including product, price, promotion, and distribution. 3. Explain the process of market segmentation and why it’s important for a firm to select a specific target market. Answer: Market segmentation is the process of dividing a market into distinct subsets (or segments) that behave in the same way or have similar needs. 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. Start-ups are usually best served by zeroing in on a specific target market. 4. Describe the requirements for successfully segmenting a market. Answer: 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 5. What is the biggest mistake that people make when selecting a target market? Answer: 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. 6. Why is estimating the size of a target market referred to as a “tricky” proposition? Answer: 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. 7. Describe why it’s important to include a section on “buyer behavior” in a business plan. Answer: 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 start-up knows about the consumers in its target market, the more it can gear its products or services to accommodate their needs. 8. Explain the purpose of a competitor analysis. Answer: 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. 9. Explain why it’s important to collect competitive intelligence, and describe some of the techniques that are used to collect it. Answer: To complete a meaningful competitive analysis grid, you must first understand the strategies and behaviors of your competitors. This requires you to engage in competitive intelligence. You can gather competitive intelligence by: attending conferences and trade shows, reading industry-related trade publications, reading industry reports via online resources, purchasing competitor’s products to understand their features, benefits, and shortcomings, talking to customers about what motivated them to buy your product as opposed to your competitors’ products, and studying competitors’ websites. 10. Briefly describe the four separate ways of estimating the annual sales and market share of a new business. Answer: There are four basic ways for a new firm to estimate its initial sales: (1) 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, (2) find a comparable firm or a company that sells a comparable product, (3) conduct Internet searches to try to find magazine and newspaper articles that focus on firms in your industry, and (4) 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. Application Questions 1. Recreate Prime Adult Fitness’s estimate of the size of its target market, and substitute the county that your college of university is located in for Seminole County, Florida. How do your numbers compare with the numbers reported in Prime Adult Fitness’s estimate? Answer: To recreate Prime Adult Fitness’s estimate of its target market size with a different county, follow these steps: 1. Find the Population: Look up the population of your college's county. 2. Determine Target Market Percentage: Use the same percentage of the population that Prime Adult Fitness used for Seminole County. For example, if they used 20%, apply this percentage to your county’s population. 3. Calculate: Multiply the county’s population by the target market percentage. Comparison: Compare your calculated target market size with the number reported for Seminole County. The difference will show how the market size varies with different county populations. For exact numbers, you'd need to provide the population of your county and Prime Adult Fitness’s target market percentage. 2. Prepare a competitive analysis grid for Runkeeper (www.runkeeper.com), a company that makes an iPhone app that tracks workouts. Summarize what you learn about Runkeeper’s competitive landscape and its points of differentiation through this exercise. Answer: Summary: Runkeeper faces strong competition from apps like MapMyRun, Strava, and Nike Run Club, each with unique strengths such as strong community features, specialized tracking, and integration with broader ecosystems. Runkeeper differentiates itself with its robust workout tracking, user-friendly interface, and flexible goal-setting features. Its key advantages include ease of use and extensive workout data analysis. However, it competes with apps offering more specialized or integrated features, such as those within Nike's ecosystem or Strava's focus on segments and challenges. 3. Put yourself in the place of an investor listening to Prime Adult Fitness present the market analysis portion of its business plan. Think of three penetrating questions that you would ask about the market analysis. Answer: 1. What specific data sources and methodologies did you use to estimate the size and growth potential of your target market? • To ensure accuracy and reliability of market projections. 2. How do you plan to differentiate Prime Adult Fitness from competitors in terms of market positioning and value proposition? • To understand the unique selling points and competitive edge. 3. What are the key demographics and psychographics of your target market, and how do you plan to reach and engage them effectively? • To assess the effectiveness of marketing strategies and target audience understanding. 4. Imagine you’re writing the business plan for a smoothie shop that you plan to launch near the campus of the college or university you attend. Make an estimate of your Year 1 sales using the bottom–up approach to the multiplication method. Answer: To estimate Year 1 sales using the bottom-up approach: 1. Estimate Customer Traffic: Assume an average of 100 customers per day. 2. Average Spend per Customer: Assume each customer spends $6 per visit. 3. Operating Days: Assume the shop operates 300 days a year. Calculation: • Daily Sales = 100 customers × $6 = $600 • Annual Sales = $600 × 300 days = $180,000 Year 1 Sales Estimate: $180,000 5. Fitstar (www.fitstar) is a company that produces an app that turns an iPad into a personal trainer. When Fitstar first started (with a single app that offered personal training sessions via an iPad), how would you have estimated Fitstar’s initial sales? Select one or more of the four ways of estimating a new firm’s sales outlined in the textbook, and explain how you would have utilized each method. Answer: To estimate Fitstar’s initial sales, you could use the following methods: 1. Market Research: Analyze market data on the demand for personal training apps and estimate potential sales based on similar app launches and industry trends. 2. Bottom-Up Approach: Estimate sales by identifying the target market size (e.g., iPad owners interested in fitness) and multiplying by the expected adoption rate and average spend per customer. 3. Top-Down Approach: Look at the overall market size for fitness apps and estimate Fitstar’s share based on competitive positioning and marketing strategy. 4. Analogous Sales: Use sales data from similar apps or startups in the fitness app market as a benchmark to project Fitstar’s initial sales. Each method provides a different perspective, combining them can offer a more comprehensive estimate. Additional Activities 1. What? So What? Purpose: to demonstrate the difficulty of defining the nature of a business. This activity pairs students to challenge each other in an effort to narrow their explanations of the benefits of a product or service. Conduct this activity after introducing the purposes of market analysis. Begin by putting students into triads. Ask two of the students to each find one item currently in their possession (pockets, book bags, purses, etc.) and put it on the table in front of them. For example, this might be a wallet or cell phone. The third student is appointed as a scribe and is tasked with observing and taking notes during the activity. Set a time limit of about 5 minutes per student, for a total of 10 minutes total. One at a time, each student will describe the benefits of owning the article. The other student will continuously ask, “What?” and “So what?” This forces the student to improve his or her definition of the product’s features and benefits. When the activity has been completed, ask the observers to discuss how the definitions of the products evolved over the course of the activity. Ask the student who presented a product for their analysis of what happened when they were challenged by the other student. 2. Competitor Matrix Purpose: to practice identifying key success factors of competitors. After lecturing on the competitive analysis grid, tell students it is time to apply what they just learned. Although this activity can be conducted as an individual assignment, it is probably most effective when done in groups. Choose one well-known local business for all the groups to research. For example, choose a local hair salon or sports bar. This will incite a bit of competition between the groups, making it more enjoyable. (When students are having fun, they learn and retain more.) Restrict the number of competitors to be included in the matrix to three or four. Begin by asking the entire class to identify one or two of the key success factors for this firm, but do not identify more than two. For example, a key success factor might be a good location. Then ask them to identify one of this firm’s competitors. You just want them to get started, but have the groups to identify another four or five factors as well as two or three competitors independently from the other groups. Next ask the groups to create a competitor matrix for this business. Give them a set period of time to complete the process; 15 minutes might be sufficient. At the end of the time period, ask each group to present their competitor matrix to the rest of the class. Encourage the students to ask questions of and provide constructive critiques of the presenters. 3. Trade Associations Purpose: to determine the extent of information available from trade and professional associations. This is a challenging task, as many associations will not provide revenue estimates to nonmembers. Assign students to identify all of the trade or professional associations for a common type of business, such as a shoe store or bakery; this will require them to conduct some research to locate the association or associations. The best sources of information include the Encyclopedia of Associations and the Dictionary of Associations, neither of which is extensively available on the Internet. However, if your campus library has a subscription to Associations Unlimited, students can access both of these publications. Once they have identified the associations, students are to then contact the associations and demonstrate their creativity to attempt to determine the association’s estimate of annual sales for a small business. This activity may require three to four weeks for students to complete. Ask students to share their results in class. Consider offering extra credit or a prize for the student who demonstrated the most creative method of obtaining this information from an association. 4. Distant Competitors Purpose: to determine the extent of information available from competitors. This is a challenging task as students may encounter business owners who refuse to participate. Fortunately, this happens far less often than students expect, as most business owners (if approached tactfully) are happy to help others. Assign students to choose a common type of business, such as a shoe store or bakery, for this activity. Advise them that they are to identify one or two competitors of this business that are geographically so distant from a local business that there is no competition between them. Once they have identified the distant competitors, students are to then contact the competitors and demonstrate their creativity to attempt to determine the competitors’ estimates of annual sales for a new small business similar to theirs that might be opening in your community. This activity may require three to four weeks for students to complete. Ask students to share their results in class. Consider offering extra credit or a prize for the student who demonstrated the most creative method of obtaining this information from a distant competitor. Chapter 7 Marketing Plan Review Questions 1. Describe the difference between the market analysis chapter of a business plan and the marketing chapter. Answer: Whereas the market analysis focused on describing a firm’s target market, customers, competitors, and potential sales, the marketing plan focuses on how the firm will actually find customers and close sales. 2. Why is it important for the marketing plan to be developed with the customer plainly in mind? Answer: Beyond producing a product or service that accommodates your customers’ needs, you should know the amount of disposable income they have, the periodicals they read, the media they watch, and so on in order to fine-tune your marketing strategy and lower costs. 3. What is a company’s marketing strategy and why is it important? Answer: 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. 4. What is meant by a company’s “positioning” strategy? Answer: 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. 5. What is the purpose of a product attribute map? Answer: A product attribute map is a useful way to visually depict a firm’s primary point of differentiation by articulating two of a product’s most important attributes and plotting this data relative to competitors. 6. Describe the difference between cost-based pricing and value-based pricing. Answer: 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. 7. What is the price-quality attribution? Answer: Most consumers make a price-quality attribution, naturally assuming that the higher price product is also the better quality product. 8. Describe the differences between advertising and public relations? Which of the two alternatives do start-ups tend to prefer? Answer: 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. 9. Provide several examples of public relations strategies. Answer: 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 10. Describe how firms should approach the topic of distribution and sales. Answer: This section of your business plan should clearly identify your distribution and sales plan in terms of who will make the sales. To assist you with thinking through these issues, focus on (1) distribution and sales alternatives and (2) sales strategy and related issues. This critical issue lies at the heart of a firm’s overall marketing plan and its ability to effectively reach its target market. Application Questions 1. Spend some time looking jitterbug’s Website (www.greatcall.com/jitterbug). Comment on each element of jitterbug’s marketing plan (product, price, promotion, and distribution and sales). On a scale of 1 to 10 (10 is high), rate the strength jitterbug’s overall marketing plan. Justify your rating. Answer: Here's a brief analysis of Jitterbug's marketing plan: Product: Jitterbug offers simplified, user-friendly phones designed for seniors, featuring large buttons, a clear display, and easy navigation. This tailored approach meets the specific needs of their target market. Price: Their pricing is competitive, with options for different budgets, and they offer affordable plans with clear pricing structures, which is appealing to their audience. Promotion: Jitterbug employs a mix of direct marketing, online advertising, and partnerships with senior-focused organizations. Their promotional materials highlight ease of use and benefits tailored to seniors, effectively reaching their target demographic. Distribution and Sales: Available through their website and major retailers, Jitterbug ensures broad accessibility. They also offer customer support tailored to seniors, enhancing their sales process. Rating: 8/10 Justification: Jitterbug’s marketing plan effectively targets its niche market with well-suited products, competitive pricing, targeted promotions, and broad distribution. The high rating reflects their strong alignment with customer needs, though there could be room for further innovation and digital engagement improvements. 2. Spent some time studying the Website of ModCloth (www.modcloth.com), an online company that makes apparel products for women. Describe ModCloth’s position strategy and its points of differentiation from its competitors. Answer: ModCloth’s Positioning Strategy: ModCloth positions itself as a vintage-inspired fashion brand offering unique, retro-style apparel and accessories for women. Their focus is on providing distinctive, fashionable pieces that stand out from mainstream fashion, catering to customers who appreciate quirky and timeless designs. Points of Differentiation: 1. Vintage and Retro Style: ModCloth’s emphasis on vintage and retro fashion sets it apart from competitors who offer more contemporary or generic styles. 2. Exclusive Designs: They offer exclusive and often one-of-a-kind pieces, enhancing their appeal to customers seeking unique fashion items. 3. Community Engagement: ModCloth engages its customers through interactive features like customer reviews, style polls, and community voting on designs, creating a more personalized shopping experience. 4. Size Inclusivity: They provide a wide range of sizes, promoting inclusivity and catering to diverse body types. Overall, ModCloth differentiates itself with its unique style, exclusive designs, community-driven approach, and commitment to size inclusivity. 3. Study the Website of Game Truck (www.gametruckparty.com), a franchise organization that will bring a video game party in especially equipped trucks directly to your home or business. Make a list of the types of public relations activities that the owners of Game Truck and their franchisees could engage in to promote the company. Answer: Here are some public relations activities Game Truck and its franchisees could engage in: 1. Local Media Coverage: Secure features or interviews in local newspapers, radio, and TV stations to highlight unique party experiences. 2. Community Events: Sponsor or participate in community events, fairs, or charity fundraisers to increase visibility and engagement. 3. Influencer Partnerships: Collaborate with local influencers or bloggers to review and promote Game Truck parties on social media. 4. Customer Testimonials: Share positive reviews and testimonials from satisfied customers to build credibility and trust. 5. School and Youth Organization Outreach: Partner with schools and youth groups to offer special packages or promotions for parties and events. 6. Press Releases: Issue press releases about new locations, special promotions, or milestones to keep the public informed and interested. 7. Event Sponsorship: Sponsor local gaming tournaments or esports events to align with gaming culture and reach a relevant audience. 4. Brainstorm a business idea of your own. Write an elevator speech for your business idea following the guidelines for preparing an elevator speech provided in Chapter 1. Next, develop a sales process for your business following the outline provided in Figure 7-3. Answer: Business Idea: "GreenBox" delivers curated eco-friendly home products monthly to promote sustainable living. Elevator Speech: "GreenBox makes sustainable living easy with a monthly subscription of curated eco-friendly products delivered to your door. Enjoy high-quality, green items that help you live sustainably without the hassle. Join us and make a positive environmental impact effortlessly!" Sales Process: 1. Lead Generation: Use social media and SEO to attract interest. 2. Lead Qualification: Capture leads via a sign-up form or quiz. 3. Needs Assessment: Send a survey to personalize product selection. 4. Proposal Presentation: Showcase subscription options and benefits. 5. Handling Objections: Address concerns with FAQs and support. 6. Closing: Offer discounts or bonuses for new subscribers. 7. Follow-Up: Send thank-you, gather feedback, and encourage referrals. 5. Think of a company other than Netflix, Dell or IKEA which has innovated in a very meaningful way in regard to how it distributes and sells its product or service. Write a short critique of how this innovative distribution or sales strategy has contributed to the company’s success. Answer: Company: Warby Parker Innovation: Warby Parker revolutionized the eyewear industry with its direct-to-consumer model, offering high-quality, stylish glasses at a fraction of traditional retail prices. They introduced a Home Try-On program, allowing customers to select five frames to try at home for free before making a purchase. Critique: Warby Parker's innovative distribution strategy significantly contributed to its success by reducing overhead costs associated with physical stores and providing a convenient, risk-free shopping experience. The Home Try-On program not only increased customer satisfaction and conversion rates but also built brand loyalty and trust. This approach allowed Warby Parker to disrupt the eyewear market, attract a broad customer base, and maintain competitive pricing, all of which have been key drivers of its growth and success. Additional Activities 1. Burger Wars Purpose: to practice differentiating similar products. After lecturing on differentiation, ask the students to form discussion groups. Tell them they are going to brainstorm for this activity, and remind them of the rules of brainstorming (fast and furious, quantity over quality, piggybacking encouraged, no criticism, appoint a scribe). Their task is to compare fast-food hamburgers sold by two popular companies; have the students identify the two restaurants. Students are to identify as many differences between the two hamburger products as possible within a very short time period (5 to 10 minutes). When time is up, ask the groups to review their lists, and narrow down the list to only the main two or three differences. Then ask the scribes to share their groups’ most important differences with the rest of the class; if possible, have the scribes write these on the board. Finally, ask the entire class to identify how these points are memorable and distinct, and if these two fast-food restaurants do a good job at differentiating their products. 2. Benefits or Features? Sold! Purpose: to compare and contrast benefits and features, and practice the sales process. This is a two-part activity; if you have limited time, you could choose to only conduct one of the two parts. Part 1: After lecturing on the differences between benefits and features and the sales process, assign the students to form groups of four students. (If you have a student without a group, assign that student to be an observer of this process.) Hold up a common everyday product, such as a flash drive, paper clip, pen, notebook, briefcase, or textbook. Each foursome is to make a written list first of the features of the product, and then a second written list of the benefits of the product. Give them a short period of time to do so, such as 5 or 10 minutes. Ask each group to first share the features of the product with the rest of the class, while you listen closely for students who have identified benefits rather than features. Repeat the same process with their list of benefits, again listening carefully for confusion with features. Part 2 of this exercise requires the students to pair up with one other person in their group to role play the sales process, selling and buying the same product used in Part 1. Student A plays the role of the salesperson, and Student B plays the role of the customer. Ask the “customers” to play their roles as if they are skeptical or unsure if they really want or need the product. Try to build some competition into the role play to make it more enjoyable for the students, as they will learn more if they have some fun with this. Allow them approximately 10 or 15 minutes to close the sale. After time has expired, ask the customers who chose to purchase the product what convinced them to buy—was it a feature or a benefit? Ask the salespersons what part of the sales process was most difficult or ineffective, and which part was the easiest or most effective. 3. PR Anyone? Purpose: to discover how prevalent free publicity is in the local newspaper. For this activity, you will need copies of the local newspaper or magazine. Ideally, you will have one for each student, but this activity can be accomplished with small groups sharing one newspaper. If the newspaper is large, divide the sections among the various groups of students. After lecturing on public relations, comment on the fact that few small businesses realize the true potential of free publicity to promote their businesses. Then hand out the newspapers and ask students to skim through the articles to locate the names of as many businesses or products and services discussed in an article as they can. They should not choose a product or service that is in a paid article. Assign a time limit of approximately 10 minutes. Debrief the exercise by asking each student or group to share its lists of businesses mentioned in the newspaper or magazine—write the names of the businesses on the board. Then ask students: ○ How many of these businesses have you heard of prior to reading these articles? ○ Which of these businesses have you never heard of before? ○ Have your opinions (of these businesses) improved, stayed the same, or decreased as a result of the articles? This exercise could also be conducted to focus on social media marketing websites. 4. Pickup or Delivery? Purpose: to demonstrate that a firm’s chosen distribution channel can help to differentiate its products or services from its competitors. After lecturing on distribution and sales alternatives, ask if anyone knows which pizza restaurant was the first to begin delivering pizza. (It was Domino’s ® that first capitalized on this distribution method.) Then ask how many students prefer Domino’s ® over pizzas offered by other restaurants. Now provide groups of students with a list of products and services and ask them to identify which one(s) might also be able to benefit by choosing a distribution method that is unique among the competition. You might include products and services such as chairs, pillows, pet toys, haircuts, and shoes. Debrief by asking each group to share its choices and explain its reasoning. Chapter 8 Management Team and Company Structure Review Questions 1. Why is the management team and company structure section referred to as a pivotal chapter in a business plan? Answer: 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. To what degree does the way a firm assembles its management team provide an indication of the extent to which the managers of the firm are open to advice and are able to generate enthusiasm for their firm? Answer: When a firm receives advice from several unpaid consultants, it shows that the people behind the firm are willing to share power and are able to garner support for their business ideas. 3. Why is it important to show how a company will evolve in regard to the composition of its management team? Answer: You should describe the management team in terms that are 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 personnel. Indicate where the major gaps are and how quickly the company will be adding personnel. 4. Why do investors tend to prefer management teams who have worked together before? Answer: Many investors prefer team members who’ve worked together before. The thinking is that if people have worked together and decided to partner to start a new firm, they get along personally and trust one another. This scenario helps relieve a persistent worry—that the initial managers of a firm won’t get along with one another. 5. Describe what a management team skill profile is and how it is set up. Answer: A management team skill profile is a grid that lists the major skills needed in a firm on the horizontal axis (marketing, finance, manufacturing, IT, etc.) and the current members of the management team on the vertical axis. The grid is completed by indicating which skills are satisfied by each management team member. The skills with no coverage represent gaps in the management team. 6. Why is it important to fully disclose the ownership structure of a new venture and the compensation of the members of its management team in the business plan? Answer: Potential investors should be able to ascertain the ownership structure of the firm. List each owner, his or her percent ownership in the company, and any options pool of stock. Investors will want to be reassured that the founders understand the importance of an options pool as a tool to attract high-quality people. 7. What are some of the common mistakes to avoid in putting together an initial management team? Answer: The common mistakes to avoid when putting together your initial management team and writing your business plan 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 vague or unclear plans for filling the skill or competency gaps that are disclosed or clearly exist. 8. What role does a company’s board of directors play in its overall management team? Answer: 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. 9. What is a board of advisors? What role does a board of advisors play in the management of a firm? Answer: 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. 10. Describe the purpose of an organizational chart. Answer: 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. Application Questions 1. Steve Perkins developed and launched a successful smartphone app that helps people manage their finances. He just received funding and plans to develop several additional smartphone apps that deal with personal finances, investing, and planning for retirement. Steve will need to hire several employees to ramp up his company and is concerned about making smart hiring decisions. Up to this point, he’s been his company’s only employee. Steve’s question to you is, “What are the factors I should be thinking about in terms of building my management team and roster of employees?” Answer: For his management team, Steve should be looking for individuals who possess complimentary rather than redundant skills, share priorities and work habits that are in sync, have common goals and aspirations, and finally, have a Founder’s Agreement. 2. Melanie Ford has read several books on how to write a business plan. All of the books stressed the importance of the management team section, stressing the number one thing that investors focus on is the strength of a new venture’s management team. Melanie can’t figure out why this is true. Recently, she wrote a letter to the editor of Inc. magazine and asked, “Why do investors put so much stock in the portion of a business plan that deals with the strength of the management team? If a start-up’s product doesn’t do well in the marketplace, what’s the value of having a top notch management team? If you were the editor of Inc., how would you reply to Melanie’s letter? Answer: The management team is often the thing that wins funding among competing plans versus the market or the product idea. This is based on the prevalent belief that unless a proposed new venture has a strong management team, little else matters. A strong management team, including the board of directors, provides oversight and can create entrée with suppliers, investors, and clients. 3. If you were one of the founders of Prime Adult Fitness, make a list of the activities that your 4-member general advisory board and your 10-member customer advisory board could help you with. Answer: General Advisory Board: 1. Strategic Planning 2. Financial Oversight 3. Market Analysis 4. Partnerships 5. Risk Management 6. Compliance 7. Operational Efficiency 8. Innovation 9. Brand Development 10. Leadership Support Customer Advisory Board: 1. Feedback on Services 2. Product Development 3. Customer Experience 4. Pricing Strategies 5. Marketing Ideas 6. Community Engagement 7. Technology Needs 8. Event Planning 9. Service Customization 10. Customer Retention 4. Imagine you are starting a firm with two partners, and you are all college seniors with limited work experience. You don’t have impressive credentials to include in the management team section of your business plan. How can you construct this section of your plan, and the company itself, in a way that reassures the readers of the plan that you know what you’re doing and will get the advice you need to launch a successful company? Answer: The should include discussions about creating a strong board of directors, board of advisors, and utilizing a competent crew of other professionals to provide guidance and expertise in key areas. 5. Kim Smith, David Whitten, and Shelly Andersen are proposing to launch a company that will help college students streamline the process of applying for student loans and other forms of financial aid. They submitted their business plan to an investor, who just sent them a text that read, “I’m going through the Management Team section of your business plan, and don’t see an organization chart. Can you submit it to me?” They replied to the text by saying, “We haven’t fleshed out a formal organization chart yet. Once we launch the firm, we’ll sort out what our specific roles will be and develop the organization chart.” To what degree do you think this reply will satisfy the investor? Why is it important to have a formal organization chart agreed upon and in place prior to the launch of a business? Answer: Investors want to see that the internal structure of a company makes sense and that the lines of communication and accountability are clear. A description of your company’s structure also reassures the people who read the plan that you know how to translate your business idea into a functioning firm. The chart should show what the business looks like today and what it intends to become in the short-term or intermediate-term future. A frequent source of tension in new ventures, particularly if two or more founders start out as “equals,” is a failure to delineate the specific roles they will fill. Additional Activities 1. Famous Founders Purpose: to reveal the background of the founders of famous entrepreneurial ventures. This activity works well as an icebreaker to introduce this chapter, or can be used at the conclusion of your lecture on the management team. Before class, choose one or two well-known entrepreneurs. For example, Steve Jobs and Steven Wozniak (founders of Apple Computer) or Michael Dell and Bill Gates. Do a bit of Internet research to develop a brief biography of each person. Provide copies of these bios to your students. In class form the students into discussion groups of four to six people. Ask them to review the bios of these famous founders and answer the following questions: ○ What level of, and kind of, education did they have? ○ What kinds of industry experience did they have prior to starting their famous business? ○ What kinds of previous entrepreneurial experience did they have? ○ On a scale of 1 to 5 (5 being high), how passionate were they about their businesses? Debrief this activity by using the whip technique. Make a statement such as, “One thing that increases the success of a new venture team is ______.” Then ask for a volunteer to quickly fill in the blank with one word. That student then calls on another student to fill in the same blank with another word. Continue this process until you are satisfied that all of the key concepts have been suggested. 2. Green Light Signals Purpose: to identify individuals to add to a board of directors who will “signal” the legitimacy of a high-potential venture to investors. Prior to class, visit the website of a well-known company such as Apple Computers. Find the list of the members of their board of directors. After lecturing on the types of individuals who should be invited to serve on a board of directors, show your students the list of individuals actually serving on the board of the well-known company you researched. For example in 2007, Apple’s board of directors included the former chairman and CEO of Intuit, the chairman and CEO of J. Crew, Al Gore Jr., the CEO of Google, and other very high-profile individuals. Debrief this activity by asking some or all of the following questions: ○ What does each individual’s presence on the board indicates to a potential investor? ○ Who they believe would signal the legitimacy of a well-known local business? ○ Finally, encourage students to be creative and really stretch the boundaries of their own personal networks. For example, I once had a student whose uncle was very good friends with Donald Trump! 3. The Organization Chart Purpose: to practice drawing an organization chart. After lecturing on company structure, tell the students that it is now their turn to draw an organization chart. Identify a well-known local small business, and provide the students with the job titles of positions most likely to be employed by the business. Ask the students to use the job titles to draw the organization chart. Then ask students to identify tasks that could be accomplished by a consultant, accountant, or other advisor. Chapter 9 Operations Plan and Product (or Service) Development Plan Review Questions 1. Why is it important to include an operations plan in a business plan? Answer: The operations plan section of the business plan outlines how your business will be run and how your product or service will be produced. The topics that are generally incorporated include: operating model and procedures, business location, facilities and equipment, and operations strategy and plans. Other topics may be included depending on the nature of the business. 2. When writing the operations plan and the product (and service) design and development plan sections of a business plan, why is it important to strike a careful balance between adequately describing the topics and not going into too much detail? Answer: Your readers will want an overall sense of how the business will be run and how your product will be developed, but they generally will not be looking for detailed explanations. 3. What is the most important rule of thumb for writing the operations and the product design and development sections of your business plan? Answer: The most important rule of thumb for writing the operations and the product design and development sections of your business plan is to focus on the aspects of each of these areas that are either essential to the success of your business or sets you apart from your competitors. Routine topics should be dealt with lightly and quickly. 4. According to the chapter, there is a vast difference between thinking up a new product idea and actually designing and manufacturing the product. Explain the nature and importance of this difference. Answer: According to Stanley Rich and David Gumpert, authors of Business Plans That Win, there are four distinct categories of companies in terms of how ready their products or services are to being sold. From Level 4—Going Concern, which indicates companies where the product or service has not only been developed, but is being produced and sold to customers who are satisfied to Level 1—A Great Idea, But . . . , which describes a company where there is an idea for a product or service but no movement beyond the idea stage. No prototype of the product exists. Rich and Gumpert state that it’s tough for Level 1 companies to get funding unless they have an exceptionally highly qualified management team or an idea that’s an obvious winner. 5. What is an operations flow diagram and why is it important? Answer: A useful way to illustrate how a product or service will be produced is to include an operations flow diagram in your business plan. An operations flow diagram shows the key steps in the production of a product or the delivery of a service. 6. Identify three specific instances in which a business’s location is a critical factor in its ability to operate efficiently and effectively. Answer: Among the possible choices are: proximity to qualified labor, closeness to suppliers, access to transportation, such as major airport or an interstate highway, access to international shipping alternatives, proximity to customers with a profile conducive to a firm’s business, access to favorable state and local tax rate, access to economic incentives for locating in a certain area, and proximity to a high-quality community in terms of public education, recreational opportunities, health care, and the arts to attract a high-quality workforce. 7. What is a product prototype and why it is important? Answer: If you are a very early stage firm and have only an idea, you should carefully explain how a prototype of your product will be made. A prototype is the first physical depiction of a new product. i 8. Describe what usability testing is and why it is important. Answer: Usability testing is a form of product/service feasibility analysis that measures a product’s ease of use and the user’s perception of the experience. These are sometimes called user tests, beta tests, or field trials. Usability testing is particularly important for software and website design. 9. To what extent should a start-up be candid and transparent regarding the challenges and risks associated with its product development process? Answer: You should be very candid and transparent in identifying any major anticipated design and development challenges (and risks) for two reasons: (1) your reader will anticipate that challenges and risks exist and will want to know what they are and (2) your reader will want to see evidence that you are aware of the risks and challenges that exist. 10. What are the four types of intellectual property, and why is it important to address intellectual property issues in a business plan? Answer: The four types of intellectual property are patents, trademarks, copyrights, and trade secrets. It’s important to address these issues because intellectual property has value in the marketplace and can constitute a competitive advantage for the firm. Application Questions 1. Fitbit (http://www.fitbit.com) is the name of a company that makes a product called the Fitbit Force, which is a wireless-enabled device that measures data such as the number of steps walked, quality of sleep, and other personal metrics. Spend some time looking at Fitbit’s Website to acquaint yourself with its product offerings. What do you think were the major “operational” issues that Fitbit included in its business plan? Answer: Fitbit's major operational issues likely included: 1. Product Development and Innovation: Ensuring the Fitbit Force and other devices incorporate the latest technology for accurate tracking and remain competitive in the wearable tech market. 2. Manufacturing and Supply Chain Management: Coordinating production processes, sourcing materials, and managing inventory to meet demand while maintaining quality. 3. Data Security and Privacy: Implementing robust measures to protect user data from breaches and ensuring compliance with privacy regulations. 4. Customer Support and Service: Providing effective support for troubleshooting, warranty claims, and addressing customer feedback to maintain satisfaction. 5. Marketing and Distribution: Strategically promoting products and managing distribution channels to reach target markets effectively. 2. Discuss the manner in which a company like Fitbit can use “operations” as a means of gaining a competitive advantage over its competitors. Answer: Fitbit can gain a competitive advantage through operations by: 1. Innovative Technology: Continuously advancing product features and accuracy to stay ahead of competitors. 2. Efficient Manufacturing: Streamlining production processes to reduce costs and improve quality. 3. Data Analytics: Leveraging user data to enhance product development and personalized experiences. 4. Rapid Delivery: Ensuring quick and reliable distribution to meet consumer demand. 5. Customer Support: Offering exceptional service and support to build brand loyalty and differentiate from competitors. 3. Imagine that you have invented a new type of backpack for students to carry their books on campus. As part of your business plan, you have decided to “outsource” the actual manufacturing of the backpack to a company in China. Do some research to determine how you would locate a company in China to manufacture your backpack, and what type of arrangement you would likely enter into with this company. How much information should you include in your business plan about the company and your arrangement with them? Answer: Student responses will vary but may include a discussion about the degree to which they will hold foreign partners accountable for the working conditions in their factories and for their environmental standards. To locate a manufacturer in China: 1. Search Online: Use Alibaba, Made-in-China, or Global Sources. 2. Trade Shows: Attend industry events for connections. 3. Industry Contacts: Get recommendations from trade associations. Arrangement: Enter a manufacturing agreement detailing production specs, pricing, payment terms, delivery, and quality control. Business Plan Info: Include the manufacturer’s background, key agreement terms, and risk management strategies. 4. Suppose you were working on a business plan for an upscale men’s clothing store. What factors should you consider in selecting the physical location of the store? How much attention would you devote to this issue in your business plan? Answer: Factors to Consider: 1. Demographics: Ensure the location aligns with the target market's income level and preferences. 2. Foot Traffic: Choose a high-traffic area to attract more customers. 3. Competition: Evaluate nearby stores and their impact on your business. 4. Accessibility: Ensure convenient parking and public transportation options. 5. Visibility: Select a location with high visibility to increase brand exposure. Attention in Business Plan: Devote significant attention, detailing the location’s benefits, how it aligns with the target market, and its impact on potential sales and profitability. 5. Imagine you’re planning to open a coffee shop named Mountain Fresh Coffee. Your coffee shop will be much like a Starbucks or a Caribou Coffee, and will be located three blocks from the campus of a major Midwestern university. Some of the unique aspects of your coffee shop are as follows: (1) You will only employ people who have a passion for coffee, (2) all the coffee you sell will be fair trade certified, (3) the ambience of your shop will be relaxed and unhurried, and (4) you will give back 10 percent of your after-tax profits to local charities. With these factors in mind, along with your own creativity and business sense, complete both a backstage and front-stage operations model for Mountain Fresh Coffee. Make your operations model as extensive as the one for Prime Adult Fitness shown in the chapter. Answer: Front-Stage Operations: 1. Customer Experience: Friendly staff, clear ordering, high-quality fair trade coffee, relaxed ambience, and community engagement. 2. Touchpoints: Cozy layout, excellent service, and promotional events. Backstage Operations: 1. Staffing: Hire passionate staff and provide thorough training. 2. Supply Chain: Source fair trade coffee, manage inventory. 3. Quality Control: Standardize coffee preparation and maintain equipment. 4. Financial Management: Budget for operations and allocate 10% of profits to charities. 5. Logistics: Coordinate with suppliers and maintain the store. Additional Activities 1. An Amazing Operating Model Purpose: students will recognize the importance of an operating model on the success of a business. Prior to leading this activity review what’s new at Amazon.com. After lecturing on operating models, ask your students why they think Amazon.com has become so successful. What was Amazon’s only product when the firm first started (books)? Why was Amazon able to grow so rapidly when there were so many retail bookstores already competing in the market? This could be a question for any individual student to answer, or it could be used as a discussion question. Although students’ answers will vary, the correct answer is that Amazon has developed a unique operating model. It is unique because the model allows them to sell a wide variety of products at a very low operating cost. For example: ○ Instead of humans retrieving items from inventory, Amazon uses robots. Labor costs are dramatically reduced. ○ Their location costs are much lower as they are not located in expensive shopping malls, but are in warehouses instead. ○ Amazon has forged strong relationships with vendors, enabling them to enjoy just-in-time inventory management and cooperating marketing efforts, thus reducing operating costs even more. Ask students to identify other businesses with unique operating models. (Dell is another!) 2. Flowing Pizza Purpose: students will draft an operations flow diagram. After lecturing on an operations flow diagram, tell students that developing such a diagram is not as easy as it sounds. Ask students to recall the last time they went to a pizza restaurant to dine in (not for take-out or delivery). Which restaurant did they go to? For this exercise, identify a restaurant that provides a host/hostess and servers. Ask students to form discussion groups of four to six members. Tell the groups that their task is to develop an operations flow diagram. They will need paper and pencil (not a pen) for this exercise. Instruct them now to close their eyes and visual themselves as customers driving into the parking lot of this restaurant. What do they see in the parking lot? (Answers might include white lines on the pavement, signs on the building, an entrance door, etc.) Tell them to write these down on a piece of paper. Now they should imagine walking through the door of the restaurant. What is the first thing they see or encounter? (Answers should include being greeted by a host or hostess, being seated at a table with chairs, and being provided with a menu.) Ask them what items are on the tables, and what items are on the walls. Again, instruct students to write these items down on their paper. Next, instruct the students to continue visualizing the entire experience of a server bringing them water or drinks, placing their orders, the orders being given to the kitchen employees, what the kitchen employees do with the orders, what tools and equipment is used in the kitchen, and so on all the way up to the time they give their payment to the server or host or hostess at the cash register. They should have a very extensive list of every item and every employee that is involved in the operations of this restaurant. Their last task is to draw a diagram of the flow of operations for this restaurant. While they are working, visit each team to observe and coach them on the process. When everyone is finished, ask each team to share their diagram with the rest of the class. Debrief the exercise by asking, on a scale of 1 to 5 (5 is high) how easy this process was. Your final question is the most important one: How could this restaurant’s operating model be improved to make it operate more efficiently? 3. Barbeques and Barbies Purpose: to demonstrate the importance of an operations plan on seasonal businesses. Ask students to think of products or services that experience high and low seasonal impacts. For example, barbeque grills sell very well in late spring and early summer, while toys sell faster in November and December. Challenge students to think of an operations plan for a retailer of barbeque grills that would even out the seasonal sales cycle. For example, the retailer could sell fireplace equipment during the seasons that barbeque grills sell slowly. The conclusion here is that although critical and creative planning is important for all businesses, it is especially important for businesses that operate in seasonal markets. 4. Intellectual Property Audit Purpose: to determine the extent of the intellectual property of a business. After lecturing on intellectual property, explain that new ventures often do not realize the extent of their intellectual property. Ask students to identify a well-known locally owned business and to identify what intellectual property they believe this business demonstrates. Students will likely list the business’s name and logo, but often that is about all they can think of. Ask students to join discussion teams of four to six, and then brainstorm to identify every item of intellectual property they can. Remind them of the rules of brainstorming (fast and furious, quantity over quality, no criticism, and piggybacking encouraged. After asking them to appoint a scribe, give them a short time limit such as 5 or 10 minutes. What you hope to achieve is a far longer list than just name and logo. If the business is a sports bar, intellectual property might include the color scheme and layout of the exterior and interior of the building, the style of uniforms worn by employees, special recipes used to prepare food, a slogan, special events produced by the establishment, advertisements, slogans, and so on. Explain that every business should conduct this kind of an intellectual property audit at least once a year. Chapter 10 Financial Projections Review Questions 1. Why is the financial plan typically one of the last sections in a business plan? Answer: The final section of a business plan presents a firm’s pro forma financial projections. Having completed the previous sections of the plan, it’s easy to see why the financial projections come last. They take the plans you’ve developed and express them in financial terms. 2. What is the purpose of a source and use of funds statement? Answer: The source and use of funds statement is a document that lays out specifically how much money a firm needs (if the intention of the business plan is to raise money) and what the money will be used for. 3. What is the purpose of an assumptions sheet? Answer: An assumptions sheet is an explanation of the most critical assumptions that your financial statements are based on. 4. Briefly describe the three pro forma financial statements that should be included in a business plan. Answer: Pro forma financial statements include: (1) the income statement, reflecting the projected results of the operations of a firm for a given period of time, (2) balance sheet, projecting a firm’s assets, liabilities, and owner’s equity at a specific point in time, and (3) cash flow statement, which indicates whether a firm will be able to maintain a sufficient cash balance to get up and running successfully. 5. How is it possible for a firm to show a sizable net income on its income statements and still be running out of cash? Answer: Pro forma income statements are useful in envisioning a firm’s overall earnings potential and prospective changes from year to year. They don’t, however, provide an indication of a firm’s cash position. A firm can show excellent sales numbers, but if the sales accumulate as accounts receivable (or are used to build inventory), a firm can run out of cash despite glowing income statements. 6. Describe the term “cost of goods sold (COGS).” Answer: COGS (cost of goods sold) is all the direct costs associated with producing or delivering a product or service, including the material costs and direct labor. 7. Why would a current ratio of 1.1 raise concerns? Answer: Current ratio equals projected current assets divided by projected current liabilities. A current ratio of 1.1 means that a firm will have only $1.10 in current assets for every $1.00 in current debt. This is a very tight number that may cause you to wonder if the firm will be able to meet its current liabilities. 8. Describe why many people feel that the cash flow statement is the most valuable statement of the three financial statements normally included in a business plan. Answer: Many of the readers of your business plan will consider your pro forma cash flows to be the most valuable of your financial statements. The statements provide an indication of whether a firm will be able to maintain a sufficient cash balance to get up and running successfully. 9. Describe the purpose of ratio analysis. Answer: The most practical way to interpret or make sense of a firm’s historical or pro forma financial statements is through ratio analysis. In general, ratios are computed by taking numbers out of financial statements and forming ratios with them. Each ratio has a particular meaning in regard to the potential of a business. 10. Briefly describe at least one profitability ratio, one liquidity ratio, and one overall financial stability ratio. Answer: Profitability ratios compare the amount of income earned against the resources used to generate it (e.g., return on assets or return on sales). Liquidity ratios measure the relationship between a company’s short-term assets and its short-term liabilities (e.g., current ratio). Overall financial stability ratios measure the overall financial stability of a firm (e.g., debt ratio). Application Questions 1. Suppose a friend of yours showed you the pro forma income statements for his start-up and exclaimed excitedly that during its first three years of operation his firm will make a net income of $150,000 per year, which is just the amount of money, $450,000, that the firm will need to pay off a three-year loan. Explain to your friend why he might not actually have $600,000 in cash, even though his pro forma income statements say that he will earn that amount of money. Answer: Pro forma income statements don’t provide an indication of a firm’s cash position; a firm can show excellent sales numbers and run out of cash. A firm can show excellent sales numbers, but if the sales accumulate as accounts receivable (or are used to build inventory), it can run out of cash. 2. Suppose a colleague of yours is gearing up to write a business plan for a business she plans to start. She told you she plans to prepare the financial statements first to get that job out of the way before she tackles the rest of the plan. Explain to your colleague the flaw in her approach. Answer: The final section of a business plan presents a firm’s pro forma financial projections. Having completed the previous sections of the plan, it’s easy to see why the financial projections come last. They take the plans you’ve developed and express them in financial terms. You’ll find yourself referring to earlier sections in your business plan frequently while you prepare your financial projections. 3. An acquaintance of yours is looking to invest in a local restaurant. He has narrowed the possibilities to three restaurants. He has requested and received both historical and pro forma income statements, balance sheets, and statements of cash flow from each of the restaurants. He’s turned to you for advice in terms of how to use the financial statements to assist him in his investment decision. Provide your acquaintance advice on a systematic approach for using the financial statements to aid in his decision. Answer: The most practical way to interpret or make sense of a firm’s historical or pro forma financial statements is through ratio analysis. The three most common categories of financial ratios are profitability ratios, liquidity ratios, and overall financial stability ratios. 4. You have been invited to speak at a small business growth conference. The title of the speech that you’ve been asked to deliver is “Be Careful What You Wish For: How Growing Too Fast Can Financially Overwhelm A Company.” Write a summary of the points that you’ll make in your speech. Answer: They could include, among other topics, discussions about forecasting expenses using the constant ratio method, the accumulation of receivables while cash remains low and an unhealthy debt ratio if loans are secured to finance rapid growth. Another issue of concern is the cost of hiring new employees without the cash to pay them. 5. Imagine that you are an investor and that you’re leafing through the business plan of a startup that has attracted your interest. You’ve reached the financial projections section of the plan, glance at your watch, and realize you only have five minutes to make an assessment. List the items you would look at and the order in which you would look at them. Justify why each of these items would be a priority in the five minutes you have available. Answer: 1. Revenue Projections: Quickly check projected revenues to gauge growth potential and market size. This gives a snapshot of expected income and scalability. 2. Gross Margin: Review gross margin to understand profitability before operating expenses. High margins suggest strong product or service value. 3. Operating Expenses: Look at major expense categories to evaluate if they are reasonable and if the company can control costs effectively. 4. Break-Even Analysis: Find out when the startup expects to break even. This shows how long it will take to reach profitability. 5. Cash Flow Statement: Check for positive cash flow projections to ensure the startup can manage its finances and sustain operations. These items are prioritized to quickly assess revenue potential, profitability, cost management, and financial sustainability. Additional Activities 1. You Know More Than You Think Purpose: to establish that most students have already gained a significant amount of knowledge and experience about financial management. This activity is a good icebreaker to begin this chapter. Ask students to individually write a list of tasks that they currently perform to manage their personal financial lives. For example, many students have a job, a checking account, and a credit card. What are some of the tasks that they perform to maintain the income necessary to cover their expenses and how do they utilize a checking account and credit card? Set a specific time limit of perhaps 5 minutes for students to individually create their lists. Then ask all students to share their lists with as many other students as possible. Again, set a specific time limit, such as 10 minutes. When time is up, ask everyone to sit down, then ask the following questions to debrief the activity: ○ Does anyone lay out specifically how much money you need to live on and where the money will come from? (Hint: this is a source and use of funds statement.) ○ Has anyone listed any critical assumptions that your plan is based on? For example, how critical is it for you to not just keep your job but to also get an annual pay raise? (Hint: this is the assumptions sheet.) ○ Who has a checking account? Which of the financial statements discussed in this chapter is similar to a checking account register? (Hint: this is a simple cash flow statement.) 2. Strange Words vs. Key Words Purpose: to stimulate learning and retention of important key terms. This chapter contains more key words than the other chapters, some of which may not be familiar to students. Before class, decide if you want to provide the following “words” in a handout, PowerPoint slide or some other visual aid. You will notice that the vowels and punctuation from each word or phrase have been removed, leaving only the consonants with no spaces in between. Provide the list on the next page to students at the beginning of class, and ask them to identify the relevant term from the course material as you progress through your class. Consider offering some prize or recognition to those who score the highest or finish first with all items correct, as an incentive for increasing students’ motivation. Strange Words Key Words Strange Words Key Words srcdsffndssttmnt source and use of funds statement ssmptssht assumptions sheet prfrmfnnclsttmnts pro forma financial statements ntsls net sales cstfgdssld cost of goods sold oprtngxpnss operating expenses cnstntrtmthd constant ratio method prfrmblncsht pro formal balance sheet crrntssts current assets fxdssts fixed assets crrntlblts current liabilities lngtrmlblts long-term liabilities wnrsqt owner’s equity wrkngcptl working capital crrntrt current ratio dbtrt debt ratio cshflwsttemnts cash flow statements oprtngctvts operating activities nvstngctvts investing activities fnncngctvts financing activities rtnlss ratio analysis prftbltrts profitability ratios lqdtrts liquidity ratios vrllfnnclstbltrts overall financial stability ratios Debrief this activity by asking students: ○ What was your reaction to this method of learning? ○ Did receiving the strange words in advance help or hinder your learning them? 3. Matching Review Purpose: to assess the degree of retention of Key Words. These are listed beginning of page 119 in this Instructor Manual. To reinforce recognition and understanding of major Key Words at the end of the chapter. Create a master list of the definitions of each of the Key Words from this chapter on one set of pages and a numbered list of the actual Key Words on another set of pages. (The terms, of course, should be in scrambled order—different from definitions.) Divide the class into discussion teams of two to five persons, and give each team a set of materials (Key Words, and definitions) to work with. Set a time limit for the exercise. Score each group on the number of correctly matched Key Words they identify as a group within the time period allotted to them. Provide prizes or special recognition to the winning team. Debrief the exercise by asking students these questions: ○ Which Key Words gave your group the greatest difficulty? Why? ○ Which Key Words do you still need to have clarified for you? Chapter 11 Presenting the Plan with Confidence Review Questions 1. Why is it important to carefully prepare and plan for a business plan presentation? Answer: If the presentation goes well, it can move you closer to obtaining the funding or financing you need. If it doesn’t, it can impede your chances of moving forward and represent a setback in your attempts to get your business off the ground. 2. What are the most important issues involved with preparing for a business plan presentation? Answer: The first set of issues to think about after you’ve been asked to make a verbal presentation of your business plan is how to go about preparing for the task and how to deliver an effective presentation. The second component of putting together an effective business plan presentation is to determine the content to present. 3. What is meant by the statement, “As you present your plan, your audience will not only be judging your plan, but they will also be judging you?” Answer: Like it or not, how you present yourself and the manner in which you interact with the people you will be presenting to makes as much difference as the plan itself. You get only one chance to make a good first impression! 4. Why is it important to know about the people you’ll be presenting your business plan to? Answer: Any type of common ground you can find with your audience, such as having the same college or university affiliation or a similar hobby, helps break the ice and build rapport. As long as you come across as sincere, people normally consider it a compliment that you went to the trouble of learning about their backgrounds. 5. Why is it important to practice your presentation? Answer: Many experienced entrepreneurs practice their presentations several times in front of colleagues and others to time the presentation and get feedback. It’s also a good idea to watch other people present to get a sense of what works and what doesn’t. 6. What is the proper role of PowerPoint slides in a business plan presentation? Answer: Considering the proper role of PowerPoint slides is a place where many presenters miss the mark. The slides should provide an overall context and punctuate your remarks. Your PowerPoint slides should be brief and contain only major themes and supporting points. Your audience should spend the majority of its time listening to you rather than reading your slides. 7. What are the positive aspects of involving as many of the members of a management team as possible in a business plan presentation? Answer: If you tag-team your presentation and it goes well, it shows that your team members work well together, and there is no one member of your team who is so dominant that he or she wants all the attention. It also helps keep the listener attentive and alert. It varies the pace of the presentation and allows the listener to learn a little bit about each of the individuals involved. 8. What is meant by the phrase “death by PowerPoint”? Answer: All kinds of colorful metaphors are attached to the dangers of trying to fit too many slides into a presentation or making your slides too dense, including “death by PowerPoint” and “PowerPoint poisoning” (coined first by Dilbert). 9. What is a reasonable number of PowerPoint slides to include in a 20- to 30- minute business plan presentation? Answer: A maximum of 12 PowerPoint slides is recommended in a 20- to 30- minute presentation. Many experts figure two minutes per slide (on average), so this number works well for a 20- to 30-minute presentation. 10. List the title of the slides included in the mock 12-slide business plan presentation included in the chapter. Answer: Slide 1—Overview, Slide 2—The Problem, Slide 3—The Solution, Slide 4—Opportunity and Target Market, Slide 5—Technology, Slide 6—Competition, Slide 7—Marketing and Sales, Slide 8—Management Team, Slide 9—Financial Projections, Slide 10—Current Status, Slide 11—Financing Sought, and Slide 12—Summary. Application Questions 1. You recently agreed to serve as a judge for a business plan competition at the college or university you attend. A week before the presentation, you received an e-mail from the organizer of the competition with some last-minute information. One comment in the e-mail struck you. The organizer of the competition said, “I think you’ll be really impressed with the research the students have done to validate the markets for their ideas.” If this statement is accurate, what type of research would you expect to hear from the student teams that you listen to? Answer: Primary research is vital. Students should prove that they have talked to potential customers, and that these potential customers see the problem the same way the students do. Students could also cite the results from their feasibility analysis and concept tests and cite industry experts or services such as Mintel, Bizminer, and IBISWorld in addition to their own data. 2. Make a list of 10 mistakes that you could make in a business plan presentation. Next to each mistake, make a brief suggestion for how to avoid the mistake. Answer: 1. Overloading Slides Use bullet points. 2. Ignoring Audience Tailor content. 3. Unclear Objectives State goals clearly. 4. Poor Data Visualization Use simple charts. 5. No Practice Rehearse thoroughly. 6. Ignoring Risks Include risk strategies. 7. Inconsistent Formatting Keep format uniform. 8. Focusing on Details Highlight key points. 9. Lack of Engagement Add interactive elements. 10. Ignoring Q&A Prepare for questions. 3. Josh Peters, a friend of yours, asked you to sit in on a dry run of his business plan presentation. You know that Josh is looking for $200,000 to launch his venture. At the end of the presentation, you ask Josh why he never mentioned how much money he’s looking for. He replied, “That’s a point of negotiation. I don’t want to disclose how much I’m looking for or how much of the company I’m willing to give up, until I know how interested someone is in my venture.” Discuss the pluses and minuses of Josh’s approach. Answer: Josh may feel more comfortable in withholding some information, but he should be prepared to talk about how much of the firm he’s willing to give up if he’s presenting to equity investors, or the type of terms he’s looking for if he is trying to obtain a bank loan. Josh should discuss how he plans to use the financing received, and what milestones he’ll be able to accomplish with the money. 4. Suppose you are in the process of raising capital for your startup. You have been asked by a local angel group to present your business plan at their next meeting. Describe how you would go about preparing for the presentation. Make your answer as complete as possible. Answer: 1. Understand the Audience: Research the angel group's interests and past investments to tailor your presentation. 2. Craft a Clear Story: Develop a compelling narrative that highlights the problem, solution, market opportunity, and your startup’s unique value. 3. Prepare Key Slides: Create concise, impactful slides covering the business model, market analysis, financial projections, and team. 4. Practice the Pitch: Rehearse multiple times to refine your delivery, focus on timing, and ensure you can handle Q&A confidently. 5. Gather Supporting Documents: Prepare a detailed business plan, financial projections, and any relevant market research for distribution. 6. Anticipate Questions: Prepare answers to common investor questions about market fit, competition, and financials. 7. Show Traction: Highlight any existing traction, such as customer feedback, early sales, or partnerships. 8. Plan Logistics: Confirm the presentation time, format, and any technical requirements in advance. 9. Prepare a Strong Closing: End with a clear call to action, outlining the funding amount needed and how it will be used. 10. Follow Up: Plan for post-presentation follow-ups with additional information or clarification as needed. 5. Imagine you’re an investor who is very impressed with a business plan you recently reviewed. The market for the product the business plan is focused on is huge, the founders of the company seemed to have found a real problem that needs to be solved, the management team looks good, and the financial projections are impressive. You just listened to the founders of the firm present the plan, and the presentation was weak at best. The founders seemed poorly organized, the slides weren’t sharp, and they only did a so-so job answering questions. You don’t quite know what to do next. The written plan is impressive, but the presentation was a disappointment. If the investor asked for your advice, what would you tell him? Answer: Student responses will vary but might include discussion of the importance of using the presentation as a sign of how effective a business owner the founder if likely to be. I'd advise the investor to: 1. Evaluate the Written Plan: Focus on the strong aspects of the written plan and the fundamentals of the business. 2. Assess Founder Potential: Consider the founders’ potential to improve their presentation skills and address weaknesses. 3. Request a Follow-Up: Ask for a follow-up meeting or presentation to see if the founders can address concerns and demonstrate their adaptability. 4. Check References: Look into the founders’ past achievements and seek feedback from references to gauge their capability. 5. Assess Market and Financials: Ensure the market opportunity and financials are as strong as they appear, regardless of the presentation. Additional Activities 1. Hot Buttons Purpose: to encourage students to identify the benefits and features potential investors and lenders are seeking in a business plan. This can either be an individual or group discussion. Ask students to turn again to Chapters 2 and 6 of the text. This time you want them to use the concepts of Chapters 2 and 6 to focus on profiling lenders and investors instead of customers. For example: ○ What environmental trends are lenders and investors concerned about? ○ What unsolved problems might lenders and investors be experiencing? ○ What gaps in their loan or investment portfolios exist? ○ How would they characterize the “buyer behavior” of a typical lender or investor? 2. First Impressions Purpose: to impress upon students the importance of planning to make a good first impression. Prior to using this activity in class, collect a variety of photographs, advertisements, business names, and business cards. These props should demonstrate both very good and very bad examples of attire, attitudes, and image choices. You can conduct this activity as an individual exercise, a whole-class exercise, or as a group exercise. Although you may think that it will take a lot of time to accumulate a practical supply of these items, you will actually find that it is quite easy and fast to find what you’re looking for. The first time you conduct this exercise, I recommend that you make this a homework assignment for individual students to find and bring to class the photographs, advertisements, business names, and business cards that demonstrate both very good and very bad examples of attire, attitudes, and image choices. Put students into discussion teams; each team is to select the best example of good choices and the best example of poor choices. Each team then shares its choices with the rest of the class and explains why they chose these particular examples. Once you have accumulated a supply of these props, in future terms you can move directly to putting students into the discussion teams to accomplish the same tasks. 3. Business Plan Presentations Purpose: students will apply what they learned in this chapter by actually giving a presentation in class and/or at a business plan competition. Although this exercise is very effective if done by individual students or teams as a class assignment, you can make it even more effective by inviting other faculty members or business people from the community to be in the audience. Students take the assignment very seriously when they know that someone other than just you will be evaluating their content and presentation skills. Prior to the presentations, provide your visitors with information about what the students will be doing. For example, you might provide a copy of the business plan outline, information about the students’ business concepts, the time limits for each presentation, and so forth. Ask these audience members to provide students with a constructive critique at the conclusion of each presentation—what was especially good about the presentation and what needs improvement. If you are using a rubric to grade student presentations, provide the rubric to the visitors, too. After the event, assign students to send handwritten thank-you notes to the visitors. Explain that this is yet another aspect of presenting a professional image to important individuals in the community. 4. I’ll Invest! Purpose: to stimulate students’ ability to evaluate business plans and presentations. This is another version of how to conduct student business plan presentations in your classroom. Prior to the first presentation, tell your students that they will choose which of the business plan presentations they would most likely invest in. Audience members assume that they playing the role of wealthy investors and have decided that they will invest some large sum of money ($250,000) into the best company they see today. However, students cannot invest any funds into their own business. At the conclusion of each presentation, ask students to rate the business plan and presentation based on the likelihood in which they would invest their own personal fortune. Use a rating scale of 1 to 5, with 5 indicating the highest likelihood of receiving their investment. When all presentations are completed, ask students to write the name of the business they would invest in on a piece of scrap paper, and then turn it in to you. Announce the winner to all with your congratulations. Solution Manual for Preparing Effective Business Plans: An Entrepreneurial Approach Bruce R. Barringer 9780133506976, 9781292039916, 9780132318327
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