BUSINESS PLAN
Introduction to Business Planning
Learning Objectives
By the end of this chapter, you should be able to:
• Define business planning.
• List the objectives and uses of a business plan.
• Explain how the objectives of a business plan intended for external audiences differ from those intended for internal audiences.
• List and describe the key components of a business plan.
• List and describe the key steps in the business planning process.
• Define the key requirements of an effective business plan.
As we approach the twenty-first century, the need for business planning has never been more apparent. Businesses today are confronted with increasing competitive pressures, ever more demanding customers, and accelerating and discontinuous change.
Given the new economic realities, planning cannot be an abstract exercise or a ritualistic activity. Planning must form the foundation for ensuring that the business takes those actions required to establish and sustain a competitive advantage.
Planning within organizations usually takes three forms and is done at three levels, as shown in Exhibit 1-1. Not all businesses engage in each form of planning. All businesses, however, do some planning, even if it only involves two business owners or managers thinking about and discussing what to do next. A safe generalization is that the larger and more complex the environment of the business, the more likely it is that the business will be engaged formally in all three types of planning.
Exhibit 1-1 - Planning Types and Levels
As the descriptions in Exhibit 1-1 suggest, all planning should flow from the company's strategic plan and be tied back to it. This course presumes that an organization has a strategic plan in place; it is designed to help implement a proactive and flexible approach to the development of the second form of planning—the annual business plan.
DEFINITION OF A BUSINESS PLAN
To understand the concept of a business plan and the business planning process in general, it is important to recognize that the plan is not a document. The plan may be presented through a planning document, but the business plan itself should be a set of management decisions about what a company will be doing to ensure success in the future. In its most basic form, business planning is the process whereby a company makes the following decisions:
• What products or services it will deliver
• Where it will compete
• Why the customer should do business with the company
• How it will organize and reengineer itself to accomplish its goals
Business planning is used, to some degree, by all organizations—large and small, for-profit and not-for-profit—regardless of the nature of the business. The scope and complexity of the business planning process and the resulting plan should mirror the size and complexity of the company and its business. For smaller companies that operate in a fairly stable business environment, the planning process may be an informal review of certain key aspects of the company's performance by a handful of top managers. As a company becomes larger, or as the business environment becomes less stable and less predictable, the planning process becomes more formal, comprehensive, and complex. More personnel are involved in reviewing and planning various aspects of the company's performance, and the time horizon addressed by planning decisions may extend farther into the future. As an illustration of formal versus informal business planning, contrast the neighborhood gas station to an international petroleum company. For the neighborhood gas station, the planning issues include appropriate inventory levels of a limited range of products, product
or service pricing, and cash flow management. The time horizon of the plan is no more than
1 year and frequently is only 1 month. All of the required information and decision-making
authority resides with the station owner.
In contrast, the planning process for the international petroleum company must address a much broader range of issues—for example, the acquisition of raw materials; appropriate inventory levels at several stages in a complex manufacturing process; cost control; pricing for a wide range of products; investments in capital equipment, facilities, and new product development; the search for nontraditional sources and alternative materials; the management and motivation of thousands of employees; and the distribution of hundreds of products to thousands of consumers. The information required for planning decisions exists in formal data systems and in the brains of hundreds of management personnel. The time horizon may extend more than 20 years into the future.
The key point is that, regardless of size, all businesses are engaged in some form of business planning.
OBJECTIVES AND USES OF A BUSINESS PLAN
In general, a business plan is necessary to provide a clear, precise, and meaningful sense of direction for a company for a specific period of time—usually 1 year. The preparation of an annual plan forces management to think through its intended actions and shows how they will affect various aspects of the business. Beyond these overriding purposes, a business plan can have several different objectives that, in turn, relate very closely to the plan's intended uses—both internal and external.
Internal Uses of a Business Plan
A business plan can provide several internal benefits for a company. First, it can improve performance by identifying the strengths and weaknesses of the company's operation and any potential or emerging problem areas. Improved performance also will result from developing strategies that simultaneously build on the company's strengths and correct its weaknesses.
Second, a business plan can communicate to management and staff clear expectations regarding the company's performance and priorities. Third, for companies with multiple divisions, units, or points of management responsibility, a business plan can effectively coordinate and ensure consistency in the plans and operations of the various units or divisions.
Fourth, a business plan provides a solid basis for measuring performance of the overall company and of individual units and managers. It establishes a standard for deciding if actual performance is good, bad, or indifferent. A business plan also establishes a framework for reviewing key decisions in the ongoing management of the company. As new developments and opportunities arise, a business plan provides a rational structure for evaluating their impact on the operations and performance of the overall company and its individual units.
Finally, and perhaps most important, a business plan and the process of developing it can be used to educate and motivate the key staff—such as managers and supervisors—of the company. Through participation in analyzing past performance, evaluating the impact of trends and developments, and developing action plans for the future, managers and other key staff can learn more about the total operation of a company and the relationship of their specific areas of responsibility to the achievement of the company's overall goals.
External Uses of a Business Plan
A business plan has several uses in relationships with significant parties outside the company. First, it can be used to educate outside parties regarding the objectives, structure, and performance of the company. This use becomes important if the support, either financial or nonfinancial, of outside parties is important to the company's success. A clear example is the support of current or potential stockholders or investors.
Second, a business plan can be used to secure funding from outside investors, either individual or institutional. If this use is intended, it is important to identify in advance the issues and types of information that are of primary concern and interest to the investors.
A business plan also can communicate planned actions, deflecting competitive or regulatory moves that may be under consideration by outside parties. By formalizing its intentions in a business plan, a company commits itself to action. By communicating this commitment to selected, significant outside parties, a company may preempt actions that could have a negative impact on its own plans and actions.
Given the many different objectives and uses of the business plan, management must decide whether it is desirable or necessary to distribute its plan. If the plan is to be distributed, the specific structure and content will be affected by the intended uses and target audience.
WHAT TO INCLUDE IN A BUSINESS PLAN
Every business plan—regardless of the company, the nature of its business, its size, or the intended uses of the plan—should address a number of basic issues. These issues can be organized according to five major business strategies:
1. Market strategy
2. Production or service strategy
3. Research and development (R&D) strategy
4. Organization and management strategy
5. Financial strategy
Descriptions of each strategy compose the major portion of a complete business plan. The five strategies define the areas in which management must make future-oriented decisions as part of an effective business planning process. Each strategy is highly interrelated and must be consistent with the others. This basic relationship is illustrated in Exhibit 1-2.
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