CHAPTER 2: BUSINESS PLANNING
Introduction to Business Planning
This chapter introduces the concept of business planning, emphasizing its
importance in opportunity identification and evaluation, business idea
development, and the creation of a business plan. The lack of proper
identification and evaluation of opportunities, idea development, and
business planning are frequently cited reasons for business failure. The
chapter aims to enable students to identify and evaluate opportunities,
generate business ideas, understand the concept and components of a
business plan, and develop one.
Opportunity Identification and Evaluation
Opportunity identification and evaluation is the initial and crucial stage of
the entrepreneurial process. It involves recognizing and refining viable
economic opportunities in the market. This stage consists of five main
steps: scanning the environment for ideas, identifying the opportunity,
developing the opportunity, evaluating the opportunity, and assessing the
entrepreneurial team.
Scanning the Environment/Getting the Idea: This involves looking
for ideas and business opportunities. An idea is a thought or
suggestion, while an opportunity is a favorable time or set of
circumstances. A business opportunity is a market gap that allows
for adding unrealized value by performing differently or better than
competitors. It's crucial to distinguish between a mere idea and a
genuine opportunity that satisfies a real market need for which
customers are willing to pay.
Opportunity Identification: This is the ability to perceive, discover,
and exploit opportunities that others miss, involving scanning the
informational environment and effectively using abstract, implicit, and
changing external information. Understanding the cause of an
opportunity (e.g., technological change, market shift, and government
regulation) is important for determining risks and rewards.
Opportunity Development: After identification, timely edition of the
opportunity to suit market needs. This involves systematic research to
refine/improve/enhance the idea into a high-potential, marketable
item.
Opportunity Evaluation: This critical step assesses whether a
product or service has the necessary returns to justify
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investment and risk. It involves examining the opportunity's creation
and duration, its real and perceived value, risks and returns, fit
with the entrepreneur's skills and goals, and its competitive
advantage.
Key questions for evaluation cover aspects like
product/service description, market demand, costing and
pricing, profitability, and capital requirements.
Assessment of the Entrepreneurial Team: A successful business
requires a strong team. After evaluating the opportunity, relevant
questions must be asked about the people who will run the
company, including their entrepreneurial drive, experience, passion for
the product/sector, selling skills, management capabilities, and
commitment.
Business Idea Development
A business idea is a concise description of an intended business's basic
operation. It should address what need the business fulfills, what
goods/services it sells, who its customers are, how it will sell, and its
environmental impact. Promising business ideas are those that are
compatible with sustainable resource use and respect the social and natural
environment.
There are three types of business ideas:
Old Idea: Copying an existing business idea.
Old Idea with Modification: Adapting an existing idea to fit a
potential customer's demand.
New Idea: Involves inventing something new.
Methods for generating business ideas include learning from
successful business owners, drawing from personal and others'
experiences (e.g., unmet needs, unavailable goods/services), surveying
the local business area for gaps, and scanning the environment for
resources and institutions. Etc.
Business Idea Screening
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Idea screening is the process of identifying good ideas and eliminating
poor ones.
Three approaches will be discussed:
Macro Screening: Narrows down ideas to a few, considering criteria
like the entrepreneur's competencies, financing capability, and
market demand.
Micro Screening: Further reduces ideas, focusing on solvent
demand, raw material availability, personal skills, and financial
resources.
Scoring the Suitability of Business Idea: Assigning ratings to
different business ideas based on questions related to familiarity
with operations, investment/income goals, profitability,
comfort with the business, family comfort, status satisfaction,
people skills compatibility, industry growth projections, risk
factors, time commitment, location sensitivity, and alignment with
personal/professional goals. This approach helps select the idea with
the highest score. Gathering information from potential customers,
competitors, suppliers, financial institutions, and key informants is
essential for informed screening.
Concept of Business Plan
A business plan is a crucial roadmap for starting and running a business.
It converts an idea into a successful venture by identifying
opportunities, scanning the environment, assessing feasibility, and
allocating resources effectively. It provides information to stakeholders
like investors, financial institutions, and employees, detailing functional
requirements (marketing, finance, operations, and human resources).
The plan is a blueprint for the step-by-step procedure to achieve
business objectives, identifying innovative ideas, researching
environments for opportunities and threats, assessing internal strengths and
weaknesses, and evaluating feasibility.
Objectives of a business plan include providing direction, evaluating
business prospects, monitoring progress, persuading others to join,
seeking loans, visualizing market concepts, guiding implementation,
identifying strengths/weaknesses, addressing challenges, clarifying
information gaps, identifying required resources, and documenting
ownership and growth.
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Developing a Business Plan
Developing a business plan is a step-by-step process that guides
entrepreneurs in launching a new business. It is a dynamic tool that requires
continuous review and updating.
Business Planning Process
1. Preliminary Investigation: Before drafting the plan, entrepreneurs
should review existing plans, define key business assumptions (e.g.,
inflation, market growth), scan external and internal environments for SWOT
analysis, and seek professional advice.
2. Opportunity Identification and Idea Generation: This is the initial
stage, focusing on generating new concepts, ideas, products, or services to
meet demand.
3. Environmental Scanning: After an idea emerges, the environment is
scanned to analyze prospective strengths, weaknesses, opportunities, and
threats, both external and internal.
4. Feasibility Analysis: Determines if the proposed project is feasible,
considering the environmental scanning. It is a more detailed assessment of
the project's viability within a specific environment.
5. Report Preparation: A written document detailing the step-by-step
strategies for starting and running a business, prepared after environmental
scanning and feasibility analysis.
Essential Components of a Business Plan
1. Cover Sheet: Includes the project name, headquarters address, and
promoters' names and addresses.
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2. Executive Summary: A brief (2-3 pages) overview of the business
proposal, designed to attract evaluators' attention by detailing the company,
financial figures, and salient project features.
3. The Business: Provides details on the business concept, objectives,
history (if applicable), form of ownership, and headquarters location.
4. Funding Requirement: A carefully planned section outlining funding
needs and how they will be met, including debt-equity ratio, crucial for
investors and financial institutions.
5. The Product or Services: Describes key features, product range,
advantages over competitors, and intellectual property protections (patents,
trademarks, copyrights, licensing).
6. The Plan (Functional Plans): Includes detailed plans for marketing,
operations, organization, and finance.
Marketing Plan: Outlines marketing mix strategies based on market
research.
Operational Plan: Details plant location, material requirements,
inventory management, quality control, and budget for operations.
Organizational Plan: Defines responsibilities, duties, manpower plan,
and governing laws for employees, including a budget.
Financial Plan: Typically covers two to five years, including projected
sales, income/expenditure statements, break-even point, profit/loss
statements, balance sheets, cash flows, funds flows, and ratios.
7. Critical Risks: Identifies tentative risks to evaluate business viability,
providing confidence to investors by allowing them to calculate risks.
8. Exit Strategy: Details how the organization would be dissolved and how
assets would be distributed among stakeholders, helping assess investment
risks.
9. Appendix: May include CVs of owners, ownership agreements, and other
supporting documents.
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