Business Planning Process
Before engaging on any business, an entrepreneur or business first has to identify a viable idea. In this case, an idea is feasible if it has the potential of bringing in profits, or meeting other set objectives. Objectives of the company or individual primarily set course for the idea generation process, hence if it is in the interest of a company to increase its market share, then the business idea should have something to do with increasing sales or the customer base (Harper 2003, 9).
After a viable idea has been arrived at, the next step is usually the business planning process. Here, the company or entrepreneur assesses the business idea in detail, ascertaining as to whether it matches the set forth ambitions (Drucker 2006, 17). Therefore, the business plan seeks to answer questions such as the current position of the company, or entrepreneur, specified targets and how those objectives will be achieved
Richard Stutely (an economist, author and entrepreneur) describes a business plan as a documentation of the idea in hand and its practicability (2002, 3). Once drawn, the plan can be used to guide the company or entrepreneur on the steps to follow during implementation, and future control measures. The plan also contains a situational analysis, a detailed action plan as based on both the internal and external environments (Stutely 2002, 4). A key feature to avoid during the business planning process is paralysis by analysis. Paralysis by analysis arises where the business planning process puts disproportionate input into analysis of the plan, resulting into high complexities and poor prioritization of the business planning process (Reading 2004, 10).
This is the stage where a company, or entrepreneur, develops a business idea. Entrepreneurs and companies ideally evaluate their core strengths and opportunities when developing a business idea. Also the company’s mission and vision influences the development of the idea (Harper 2003, 16. Without a clear and concise objective, an idea would be vague and offer no directives. Thus, the firm or entrepreneur has to identify a gap in the market, the products or services to sell, and identify potential customers of those products or services.
Theo Paphitis, a wealthy entrepreneur popularized by BBC2s Dragon’s Den, notes that he simply identifies viable individual ideas and makes them better (Paphitis 2009, pp. 11). In the analysis of customers, the firm should consider the benefits that will be derived by those consumers. The value derived can be used as a reference point when making pricing decisions, along with other factors such as costs, which determine the attractiveness of the business idea.
A business idea could be related to a new product or service, or an alternative of a product already in the market. In the latter case, the firm should research on the competition in the market or use industry data so as to make a choice of strategy in the market (Hitt et al. 2009, 34). Aldi, a German based discount supermarket chain, realized that competitor prices could be undercut and thereby underwent vigorous cost cutting strategies so as to pass on the cost savings to customers. The strategy helped Aldi gain market leadership from as early as the 1950s (Steinhoff et al. 2002). Businesses need to assess their capacity to meet market demands, as well as the costs of operations. An entrepreneur who has developed a new idea can look at the start up costs, or alternatively evaluate the possibility of selling the patent to an established company.
It is important for a business to operate in a clear strategic path, providing steps in which the company will most effectively achieve its objectives. The strategies put in place, combined with the resources provided by the company determine the success or failure of the business plan (Hitt et al.,2009, 36). Strategies developed need to be in line with established long term goals of the company, while considering the both the internal and external environment of the firm. The strategies can cover the activities of a company in its entirety or functional departments.
While strategic decisions are influenced by a firm’s objectives and environments, strategies are used to formulate tactical plans. Tactical plans are more short term oriented as compared to strategic objectives (Harper 2003, pp. 23), but both go hand in hand in the achievement of the organizational objectives. A strategy can be described as a broad approach that leads to the attainment of long term goals while tactics are measures or policies enforced to assist in fulfilling short term needs, which contribute to the strategy in place.
In the planning process, strategic decisions made can be based on analysis through the Ansoff Growth matrix, which assists companies to decide on product and market growth strategies (Gartner & Bellamy 2008, 76). Market analysis and research also contribute significantly to the development of strategy. By implementing a SWOT analysis, a company is able build on its strengths, resolve weaknesses, exploit and capitalize on market opportunities and avoid external threats. Porter’s competitive factors also aid in the choice of strategy, where firms could use either a cost leadership or differentiation approach to react to competition (Pettit 2007, 53).
The Ansoff product/market matrix (Illustration derived from: Reading, C., 2004. Strategic business planning: a dynamic system for improving performance & competitive advantage. New York, NY: Kogan Page Publishers.)
Market Analysis and Research
A situational analysis is essential for any business plan (Rogers & Makonnen 2002, pp. 48). The purpose of a market analysis and research is to evaluate the practicality of the business idea. Data from research illustrates the conditions in the market, opportunities as well as threats. Findings from the market analysis help in determining strategies and tactics that will be affected once the business proposal commences. In general, market analysis also includes competitor data, industry trends, macro and micro economic conditions (Reading 2004, 239).
Several tools can be used during market analysis, specifically the PEST analysis, or its extended version, PESTLE analysis, and SWOT analysis. The PEST analysis looks at the prevailing political, economic, sociological and technological environment in which the entrepreneur or company anticipates to operate in (Hitt 2009, 35). Political and economic environments are beyond the control of the firm, so an appropriate policy could be implemented to protect a company from harsh conditions in those environments. Sociological and technological environments are also not within the firm grasp of the firm, but aggressive strategies by the company could ensure that the business keeps up or sets the way forward in trends relating to the sociological and technological environments (Rogers & Makonnen 2002, 56).
Competition in the industry has a negative impact on any business since it reduces a firm’s market share, and subsequently lowers its profitability. In the business planning process, a firm should evaluate Porter’s competitive factors, developed by Michael Porter, a prolific author, scholar and professor renowned for his contribution in strategic management. Porter’s competitive factors, which include the threat of substitute products and services, ease of entry into the industry, intensity of rivalry in the industry and power of customers and suppliers, could be the driving force behind choice of strategy.
The increasing power of suppliers and customers has an adverse effect on a company’s margins, while the threat of substitute products and services reduces future sales and revenues (Stutely 2002, 46). To cope with the threat of substitute products and intensity of rivalry in the industry, a firm can use either cost leadership or a differentiation strategy, which determine the tactics formulated. The strategy formulated will thereby affect the marketing mix employed by the firm, which deals with the 4Ps; that is price, product, place and promotion (Porter 1998, 5).
Financial planning process involves the formulation of budget needs and projections of future cash flows. A key section in a business plan is the budget analysis, which recommends the capital requirements of the project, and potential returns from the capital invested. The budget also illustrates the date when the business should expect to break even, and the probable profits act as a motivating factor for both entrepreneurs and companies (Gartner & Bellamy 2008, 83). For costly projects, the proposed capital structure of the business project is also discussed.
Companies use financial analysis data to ascertain the viability of a proposed project, while an entrepreneur can use potential returns information to sell the idea to a financier, which could be a bank or venture capitalist. Multinational companies such as Carrefour S.A., a French international hypermarket chain, uses economic data in regional areas to decide on expansion policies and key financial indicators of prospective franchisees before making franchising decisions, using rapid background and historical background checks (Drucker 2006, 67).
Successful and passionate entrepreneurs are individuals who often exhibit different unique characteristics that try to explain why they seem to pursue and succeed in identifying and successfully turning simple or complex business ideas into profits. Entrepreneurs see opportunities that can be turned into cash and streams of revenue where ordinary individuals do not see. Many are times that an entrepreneur uses minimum resources to build their business empire. An example is the founders of HP Bill Hewlett and David Packard who started the company in a garage using only $ 500 in Pato Alto California U.S.A. (Reynolds 2007, 6).
Being an entrepreneur is not all about bread and butter because these individuals always face situations of hardship that are highly complex and ambiguous which demand that these individuals exhibit unique characteristics and skills that will enable them drive their businesses which are their entrepreneurial ventures out of the bushes and back into a successful strategic path (Thompson & Bolton 2004, 15).Therefore entrepreneurs must understand a good idea doesn’t guarantee success for their business ventures but they should go a step further and exploit their unique traits and skills to succeed in their business environment. Entrepreneurs possess the following characteristics self-confidence, hard-working committed, strong ego/ sense of pride and highly autonomous (Wheelen & Hunger 2002, 301-322)
Autonomy is a characteristic that is used to deduce some degree of freedom of choice and independence (Kuratko 2008, 5). Entrepreneurs are individuals who have free spirits and always embrace creativity and follow their hearts and gut felling (Bygrave & Zacharis 2008, 12). An entrepreneur goes ahead to gather all relevant facts concerning his/her business venture and makes a decision as an individual independently without due duress of other parties (Carsrud & Brännback 2007, 17).
An entrepreneur has a strong standing and is not easily swayed by pessimism of other people; they follow their own instincts and intuition. Many people get into business thinking that they are entrepreneurs, but end up being frustrated and losing all they had, because they did not have the passion anyway, but only the greed to make money. For Warren Buffet, entrepreneurs must perpetually gather knowledge within their business operational areas and therefore be part of the final decision making furthermore entrepreneurs should not follow the masses when making important business decisions (Schroeder 2009, 36-78).
Entrepreneurs are highly commitment individuals they don’t easily run out of the room when the heat is turned up (Drucker 2006, 27-50). Entrepreneurs stick to their ideas to the bitter or sweet end entrepreneurs always view pursuing business ideas as a challenge and an adventure which they intend to concur at all costs, It is therefore appropriate to compare true entrepreneurs to warriors and gladiators who stick their goals dreams and ambitions to the end (Gartner & Bellamy 2009, 30-66).
Buffet believes that in business things will not always go your way and therefore patience is required. When a business doesn’t succeed it doesn’t mean that the given market or idea is unattractive but rather the time may not yet have arrived for the business to realize profits and success. Therefore entrepreneurs should be willing to go the extra mile and be ready to practice extra patience by waiting for their ventures to succeed and realize profits.
Ambition is an entrepreneurial characteristic that is used to explain the fact that entrepreneurs are individuals with a strong desire of achieving success (Kuratko 2008. p 5). All entrepreneurs envision success and therefore are people with a unique vision of the future. Entrepreneurs always cherish and value their ideas believing that they will contribute to their success and ascension and therefore make them famous and recognized. Even during the recent recession that saw Berkshire loose billion of dollars Warren Buffet told investors to be strong and expect a much better situation in the future, this goes ahead to show the kind of ambition that an entrepreneur should have by having a futuristic and long-term vision that is somehow optimistic (Schroeder 2009, 43-59).
Entrepreneurs are hard working people who certainly give all their effort and dedication to see the success of their business ventures (Bygrave & Zacharis 2008, 26). Many are times that enter entrepreneurs work odd hours and are nicknamed workaholics because they sacrifice a lot including their social life due to the passion they posses toward their entrepreneurial ventures which they consider their own brain child. Buffet believes that entrepreneurs should dedicate their time and tom their ventures especially during the initial years of the venture taking part in every part of decision making and strategy implementation (Bowden 2008, 52-58)
Entrepreneurs are self-confident individuals who strongly believe in themselves and their abilities (Thompson & Bolton 2004.p 88). Entrepreneurs are optimistic individuals who know they can do anything so long as they believe in themselves. Confident individuals are highly intrinsic and introverts who believe they have the capabilities that can help them achieve them whatever they put their mind on they usually don’t wait on other individuals to give them a pat on the back but they rather believe the solution lays inside of them. Therefore entrepreneurs such for ideas and pursue them with hope that they will succeed. Buffet believes that if an entrepreneur doesn’t envision him/herself succeeding then he/she will not because they doubt their abilities. The presence of doubt will most likely create a psychological scenario where an entrepreneur is not well motivated to see his idea through unto the end (Adrian 2001).
An ego is a sense of self pride (Thompson & Bolton 2004, 9). People with strong egos usually have a strong personality that intends to distinguish them from others. Entrepreneurs are proud of themselves, their own abilities and their ventures. Entrepreneurs normally believe that t their ideas are the best and their ventures are above others and therefore have a deep sense of pride in what they do. It is this pride that makes them feel unique and innovative giving them a strong sense of purpose on earth. Buffet believes every entrepreneurial venture is different and unique in its own way therefore more like fingerprints and therefore it is normal for entrepreneurs to normally take pride in their creations (Drucker 2006, 188-205).
Just like managers and leaders who possess perfect characteristics, entrepreneurs also require specific skills which can be merged together with their characteristics so that these entrepreneurs can overcome the various complexities and ambiguities that exist in both the internal and external environments within which they perform their operations (Reynolds 2007, 6-12). Various changes within the dynamic and ever changing business environment can end up leaving entrepreneurs with completely obsolete innovations and therefore entrepreneurs require certain skills so that they can also move with changing times and emerge as top performers. In the absence of skills then entrepreneurial characteristics may not count in today’s world.
Products and services are made for people who have specific needs that need to be satisfied. The process of innovation and idea generation is completely different from the process of delivering and catering for consumer needs with an aim of bringing satisfaction and it is therefore necessary for entrepreneurs to have skills such as research and data gathering that will give them a precise particular date that will empower them into becoming better service and product providers (Rea & Kerzner 1997, 165). Furthermore, skills of time management, risk taking, planning, directing, controlling, and staffing are also necessary. In summary, an entrepreneur should be able to have necessary administrative skills that will enable them oversee whatever they innovatively create come to life and run smoothly with minimal hitches (Wheelen and Hunger 2002, 99).
Ideas need funding and once ideas are turned into products for sell, entrepreneurs will require financial and marketing skills that will enable them foster accountability and market the products to be accepted by the masses (Gartner & Bellamy 2009, 190). Rather than being passive participants of these processes it is important that an entrepreneur becomes an active participant by learning these processes. According to Warren Buffet an empowered entrepreneur is more likely to carry out his duties and functions more appropriately and therefore increase the output of various business processes (Schroeder 2009, 86).
The presence of the above skills will therefore enable entrepreneur prioritize and therefore appropriately implement strategies with much more accuracy through superior strategic planning that has both a short-term and long term appeal. Superior planning of a skillful manager usually develops the write tactics, programmes such as budgets, procedures and broad guideline of operations that entrepreneurial ventures can use to maximize on strengths and opportunities and minimize on threats and weaknesses (Rea & Kerzner 1997, 133-204).
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