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8-1
Chapter 8

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 The easiest part of launching a new business is
coming up with the idea
But, the great idea is just the start
 Planning for a new business requires:
1.Feasibility analysis: should we proceed with this
idea?
2.Business model: how should we proceed with this
idea?
3.Business plan: transforming the idea into a
successful business

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New Business Planning Process

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 A feasibility analysis consists of four interrelated
components:
1.An industry and market feasibility analysis
2.A product or service feasibility analysis
3.A financial feasibility analysis
4.An entrepreneur feasibility analysis

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Elements of a Feasibility Analysis

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 Industry and Market Feasibility Analysis
Two areas of focus:
1. Determining how attractive an industry is
overall as a “home” for a new business
2. Identifying possible niches a small business
can occupy profitably

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 Begin with a broad look at the industry
Use Porter’s five forces model
 Five forces interact with one another to determine the
setting in which companies compete and, hence, the
attractiveness of the industry:
1.Rivalry among competing firms
2.Bargaining power of suppliers
3.Bargaining power of buyers
4.Threat of new entrants
5.Threat of substitute products or services

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Porter’s Five Forces Model

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1. Rivalry among companies competing in the industry
Strongest of the five forces
Industry is more attractive when:
Number of competitors is large, or, at the other
extreme, quite small
Competitors are not similar in size or capacity
Industry is growing fast
Opportunity to sell a differentiated product or service
exists

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2. Bargaining power of suppliers to the industry
 The greater the leverage of suppliers, the less
attractive the industry
 Industry is more attractive when:
 Many suppliers sell a commodity product
 Substitutes are available
 Switching costs are low
 Items account for a small portion of the cost of
finished products

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3. Bargaining power of buyers
 Highest when the number of customers is small and
cost of switching to a competitor’s product is low
 Industry is more attractive when:
 Customers’ switching costs are high
 Number of buyers is large
 Customers want differentiated products
 Customers find it difficult to collect information for
comparing suppliers
 Items account for a small portion of customers’
finished products

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4. Threat of new entrants to the industry
The larger the pool of potential new entrants, the less
attractive the industry
Industry is more attractive to new entrants when:
Advantages of economies of scale are absent
Capital requirements to enter are low
Cost advantages are not related to company size
Buyers are not loyal to existing brands
Government does not restrict the entrance of new
companies

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5. Threat of substitute products or services
 Substitute products or services can turn an industry on
its head
 Industry is more attractive to new entrants when:
 Quality substitutes are not readily available
 Prices of substitute products are not significantly
lower than those of the industry’s products
 Buyers’ switching costs are high

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Five Forces Matrix

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

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 A feasibility analysis consists of four interrelated
components:
1.An industry and market feasibility analysis
 A product or service feasibility analysis

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2. Product or Service Feasibility Analysis: Is There a
Market?
Determines the degree to which a product or service
idea appeals to potential customers and identifies the
resources necessary to produce it
Two questions:
Are customers willing to purchase our good or
service?
Can we provide the product or service to customers
at a profit?

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 Primary research: collect data firsthand and
analyze it
Customer surveys and questionnaires
Focus groups
Prototypes
In-home trials
“Windshield” research

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 Secondary research: gather data that already
has been compiled and analyze it
Trade associations and business directories
Industry databases
Demographic data
Forecasts
Market research
Articles
Local data
The Internet

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 A feasibility analysis consists of four interrelated
components:
1.An industry and market feasibility analysis
2.A product or service feasibility analysis
 A financial feasibility analysis

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3. Financial Feasibility Analysis: Is There Enough Margin?
Capital requirements
Must have an estimate of how much start-up capital is
required to launch the business
Bootstrapping
Estimated earnings
Forecasted income statements
Time out of cash
Surviving at current rate of negative cash flow
Return on investment:
How much investors can expect their investments to return

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 A feasibility analysis consists of four interrelated
components:
1.An industry and market feasibility analysis
2.A product or service feasibility analysis
3.A financial feasibility analysis
 An entrepreneur feasibility analysis

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4. Entrepreneur Feasibility: Is This Idea Right for
Me?
 Entrepreneurial readiness: knowledge,
experiences, and skills necessary to have any
chance of being successful

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 Most entrepreneurs use a visual process such
as whiteboarding when developing their
business models
Develop a business model canvas comprised
of nine segments

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Business Model Canvas

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1. Value Proposition
Products and/or services offered to meet the
needs of the customers
2. Customer Segments
Narrowing the target market focuses resources
on serving a specific group of customers
3. Customer Relationships
How do customers want to interact with the
business?

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4. Channels
Channels refer to both communication channels and
distribution channels
Define how the customers seek out information about
this type of product
5. Key Activities
Build a basic checklist of what needs to be done
6. Key resources
Human, capital, and intellectual resources needed

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7. Key partners
 Suppliers, outsourcing partners, and so on
8. Revenue streams
 How will the value proposition generate
revenue?
9. Cost structure
 What are the fixed and variable costs
necessary?

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 Developing a business model is a four phase process:
1.Create an initial business model canvas
2.Test the problem that the entrepreneur thinks the
business solves for the customer
3.Test the business model in the market
Business prototyping
Lean start-up
Minimum viable product
4.Make changes and adjustments in the business
pivots

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 Business plan: a written summary of an
entrepreneur’s proposed business venture, its
operational and financial details, its marketing
opportunities and strategy, and its managers’ skills
and abilities
 Serves two functions:
1. Guides the company’s growth and development
2. Attracts lenders and investors

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 To get external financing, an entrepreneur
needs to pass three tests:
1.Reality test
2.Competitive test
3.Value test

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 Common elements of a business plan
Title page and table of contents
Executive summary
Mission statement
Company history
Business and industry profile
Business strategy
Description of products/services
Business and industry profile
Goals and objectives

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Business strategy
Competitor analysis
Marketing strategy
Showing customer interest
Documenting market claims
Target market
Advertising and promotion
Market size and trends
Location
Pricing
Distribution
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 Description of the management team
 Plan of operation
 Pro forma (projected) financial statements
Forecasts should be realistic
Include a statement of assumptions
 The loan or investment proposal
Funding sources
Repayment schedule
Implementation timetable

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Visualizing a Venture’s Risks and Rewards

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 Visualizing a Venture’s Risks and Rewards
A working business plan is used to guide the
entrepreneur
A presentation business plan is used to attract
capital

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 An entrepreneur should:
Make sure the plan has an attractive cover
Rid your plan of all spelling and grammatical errors
Make the plan visually appealing
Include a table of contents to allow readers to navigate the
plan easily
Make it interesting!
Use spreadsheets to generate financial forecasts
Always include cash flow projections
Keep your plan “crisp” – long enough, but not too long
Tell the truth – always

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 The five Cs of credit:
1. Capital
2. Capacity
3. Collateral
4. Character
5. Conditions

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 A business plan presentation should cover five basic
areas:
1. Your company and its product or services
2. The problem to be solved – use a compelling
story
3. A description of your solution to the problem
4. Your company’s business model
5. Your company’s competitive edge

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 A business plan presentation should cover five basic
areas:
1. Your company and its product or services
2. The problem to be solved – use a compelling
story
3. A description of your solution to the problem
4. Your company’s business model
5. Your company’s competitive edge

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 When making the presentation:
1. Prepare
2. Practice your delivery and then practice some more
3. Demonstrate enthusiasm about the business but don’t be
overemotional
4. Focus on communicating the dynamic opportunity your
idea offers and how you plan to capitalize on it
5. Hook investors quickly with an up-front explanation of the
new venture, its opportunities, and the anticipated benefits
to them

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6. Use visual aids
7. Follow Guy Kawasaki’s 10/20/30 rule for PowerPoint
presentations
8. Explain how your company’s products or services solve some
problem and emphasize the factors that make your company
unique
9. Offer proof
10. Hit the highlights
11. Keep the presentation “crisp” just like your
business plan

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12. Avoid the use of technical terms
13. Remember to answer the question “What’s in it for me?”
14. Close by reinforcing the potential of the opportunity
15. Be prepared for questions
16. Anticipate the questions the audience is most likely to ask
and prepare for them in advance
17. Be sensitive to the issues that are most important to
lenders and investors by reading the pattern of their
questions
18. Follow up with each potential investor

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