Chapter Two: Business Planning

Identifying and Recognizing Opportunities

 An entrepreneur identifies business opportunities
from the market while others see problems.
Most authors agree that the initial stage in the
entrepreneurial process is the identification and
refinement of a viable economic opportunity that
exists in the market.
 Without the recognition of an opportunity the
entrepreneurial process is likely to result in failure.
 Cont…
 The opportunity identification and evaluation
stage can be divided into five main steps namely;
1.Getting the idea/scanning the environment,
2. Identifying the opportunity,
3. Developing the opportunity,
4. Evaluating the opportunity and
5. Evaluating the team.
 1. Scanning the Environment/ Getting the Idea
While scanning the environment it may be
provide you with idea and business opportunities.
Idea is a thought or suggestion about a possible
course of action.
Opportunity is a favorable time or set of
circumstances for doing something.
2. Opportunity Identification
It is ability to see, to discover and exploit
opportunities that others miss.
It is the process of seeking out better ways of
competing.
 3. Opportunity Development
It is the process of combining resources to pursue a
market opportunity identified.
This involves systematic research to refine the idea to
the most promising high potential opportunity that
can be transformed into marketable items.
4. Opportunity Evaluation
A professional executed evaluation can tell whether
the specific product or service has the returns
needed to justify the investment and the risk to be
taken.
It allows the entrepreneur to assess whether the
specific product or service has the returns
needed for the resources required.
 Cont….
This evaluation process involves looking at the
creation and length of the opportunity,
Its real and perceived value,
Its risks and returns,
Its fit with the personal skills and goals of
the entrepreneur, and
Its differential advantage in its competitive
environment.
According to experts, evaluating the opportunity must answer
the following questions.
Business factor Questions for evaluation
Product or Description of the product or service, its differentiator, purpose and the need it
Service fills
o What competitive advantage / benefits does the product have?
o What is the required customer care support for this product/service?
o Is the company able to produce product and supply required aftercare
support?
Market o Where is the market demand? What is the target market? Is it generic or a
Opportunity niche?
o Industry characteristics (growth rates, change, entry barriers).
o What market share can the product reasonably expect today? In 2, 5 or 10
years?
o Timing and length of the window of opportunity?
o What competition exists in this market? Substitutes? How big is their
turnover?
o How accessible are the desired distribution channels?
Costing and o How much will it cost to develop the product and commercialize it?
Pricing o Where will the funds come from?
o How do the pricing, costs and economies of scale compare with
competitors?
o How easy is it to acquire equipment, skills and other inputs required?
Profitability o Where is the money to be made in this activity? What are the gross
margins?
o Would the return on investment be acceptable? What is the
payback period?
o What are the cash flow patterns and the source of working capital?
Capital o How much capital (people, operating expense and assets) is
Requirements required to start?
o What are the long-term capital needs?
o How much of the required capital is secured and where will the
rest come from?
o What securities are available to guarantee the required funds?
o Is there a list of potential funders? In case the funders withdraw
their capital?

Issues and risks o What risks (real and perceived) are inherent with the
product/service?
o Industry based risks e.g. is the market on a decline?
o Are there plans for surviving the death of the lead entrepreneur?
o Unreliable forecasts? Inadequate cash flow?
o Inability to grow with the demand or cope with shrinking sales?
o Supplier and value chain management?
 5. Assessment of the Entrepreneurial Team
Regardless of how right the opportunity may seem to be,
it will not make a successful business unless it is
developed by a team with strong skills.
Team factors and questions for opportunity evaluation
Team factor Questions for evaluation
Focus: o Is the founder really an entrepreneur, bent on building a company?
o Does the entrepreneur (or his team) have some experience (work or industry)?
o Do they really like this product/sector? Do they really want this?
o Can the team create products to suit that market need?
o How stressful is the opportunity for the team?
Selling: o Does the team have the necessary selling and closing skills?
Management: o Who will work full time? Do your managers represent competitive
advantage?
o Does the team have the necessary management and technical skills?
o If the required skills are not available, can they be acquired at
competitive rates?
o How is their relationship with the entrepreneur, commitment and
motivation?
Ownership: o Have the critical decisions about ownership and equity splits been
resolved?
o Are the members committed to these?
o Does the owners have enough financial capital for required own
contributions?
 Finding Gaps in the Market Place
 Entrepreneurs look at unfulfilled needs of a
society or find a sector where the demand for a
product is higher than the supply.
 Business Idea Development
A business idea is a short and precise description
of the basic operation of an intended business.
There are three types of business ideas.
1. Old Idea – Here an individual copies an existing
business idea from someone.
2. Old Idea with Modification – In this case the
person accepts an old idea from someone and
then modifies it in some way to fit a potential
customer’s demand.
3. A New Idea – This one involves the invention of
something new for the first time
 Business Idea Identification
Before you start a business, you need to have a
clear idea of the sort of business you want to run.
To identify promising business idea
among others, it is important to consider
the following:
 A. The Need will Your Business Fulfill for the Customers

 It might be a good idea to start a waste collection and

recycling service in this area.
 Not only would the owner of this restaurant need the
service, but many other residents in the area might need it as
well.
B. Good or Service will your Business Sell
Depending on your skills and the needs of the
customers, you should decide which good or service
your business will sell.
Also, keep in mind that they must be goods or services
that people are willing to pay for and at a price that will
allow you to make a profit.
C. Identifies Potential Customer: Any business cannot
succeed without customers. Therefore, it is essential that
you know who your customers will be
D. Strategy for Selling Goods or Services: How are you
going to sell your goods or services?
E. Relation between Business and Environment: Your
business can only be sustainable in the long run if it
works in harmony with the social and natural
environment.
 Methods for Generating Business Ideas
1. Learn from successful business owners: You can learn a lot from
people in your area who have already gone through the process of
establishing a business.
2. Draw From Your own and Other People Experience: Look at the list
of your interests, your experiences and your networks. The people
around you are potential customers.
3. Survey Your Local Business Area: Another way of discovering
business ideas is to look around your local community.
4. Scanning Your Environment: think about: Natural resources,
Characteristics and skills of people in the local community, Import
substitution, Waste products, Publications, Trade fairs and
exhibitions
5. Brainstorming: opening up your mind and thinking about many
different ideas.
6. Focus Group discussion: Focus group is a group of individuals
providing information on a structured format which is led by
moderators.
7. Problem Inventory Analysis: a list of problems in general
product category. It is a method of obtaining “New Idea” and
solutions by focusing on problems.
8. Free Association: First, a word or phrase related to the
problem is written down, then another and another, with each
new word attempting to add something new to the ongoing
thought processes, thereby creating a chain of ideas ending
with a new product/service idea emerging.
9. Forced Relationships: process of forcing relationships among
some product combinations. It is a technique that asks
questions about objects or ideas in an effort to develop a new
idea.
10. Attribute Listing: list the attributes of an item or problem and
then look at each from a variety of viewpoints.
 Business Idea Screening
 Idea screening is the process to spot good ideas and eliminate poor one.
The 3 approaches to screen the business idea generated are:
1) Macro screening: is aimed screening down ideas to 10.
The common criteria are:
 Are my own competencies (see strength detector) sufficient?
 Can I finance it to a large extent with my own equity?
 Will people buy my product/service (i.e. is it needed and can people afford
it)?
2. Micro Screening: is aimed screening down ideas into 3.
The common criteria used for screening are:
 Solvent demand
 Availability of raw materials
 Availability of personal skills
 Availability of financial resources
3. Scoring the Suitability of Business Idea:
 When there are more than one possible business ideas and one needs to
decide which one to follow, we use score business ideas (e.g., BI1, BI2, BI3)
by assigning a rating from 1 to 3 for each question, with 3 being the
strongest.
• After we score the ideas we sum the total and
select the idea with the highest score.
S. No Questions BI1 BI2 BI3
1. Are you familiar with the operations of this type of business?
2. Does the business meet your investment goals?
3. Does the business meet your income goals?
4. Does the business generate sufficient profits?
5. Do you feel comfortable with the business?
6. Does your family feel comfortable with the business?
7. Does the business satisfy your sense of status?
8. Is the business compatible with your people skills?
9. Is there good growth projected for the overall industry of the business?
10. Is the risk factor acceptable?
11. Does the business require long hours?
12. Is the business location-sensitive?
13. Does the business fit your personal goals and objectives?
14. Does this business fit your professional skills?
Totals
Notes: while to answer the above listed questions it is important to conduct
survey.
 Concept of BUSINESS PLAN
It is a written document describing all relevant
internal and external elements and strategies for
starting a new venture.
 It is a road map for starting and running a business.
It includes: functional plans, expected results and
critical risks.
A business plan should;
 Lay-out your basic idea of the venture,
 Describe where you are now,
 Indicate where you want to go, and
 Outline how you propose to get there.
• Above all, a business plan should explain the key
variables of success or failure, thereby helping
you prepare for both
The objectives of a business plan are to:
 Give directions to the vision formulated by entrepreneur.
 Objectively evaluate the prospects of business.
 Monitor the progress after implementing the plan.
 Persuade others to join the business.
 Seek loans from financial institutions.
 Visualize the concept in terms of market availability, organizational,
operational and financial feasibility.
 Guide the entrepreneur in the actual implementation of the plan.
 Identify the strengths and weakness of the plan.
 Identify challenges in terms of opportunities and threats
 Clarify ideas and identify gaps in management information about
their business, competitors and the market.
 Identify the resources that would be required to implement the plan.
 Document ownership arrangements, future prospects and projected
growths of the business venture.
 Business Planning Process
The various steps involved in business planning
process are discussed here below:
1. Preliminary Investigation
Before preparing the plan entrepreneur should:
Review available business plans (if any).
Draw key business assumptions on which the
plans will be based (e.g. inflation, exchange rates,
market growth, competitive pressures, etc.).
Scan the internal and external environment
Seek professional advice from a friend/relative or
a person who is already into similar business (if
any).
2. Opportunity Identification and Idea Generation
 Opportunity identification and business idea
generation is the first stage of business planning
process.
 It involves generation of new concepts, ideas,
products or services to satisfy demand.
3. Environmental Scanning: which is carried out to
analyze the prospective strengths, weakness,
opportunities and threats of the business
enterprise.
 4. Feasibility Analysis
 It is checking whether some idea will work or
not
A) Industry analysis
 Industry is a collection of firms which produce
homogenous or functionally similar products.
Example: the beverage industry contains firms
that manufacture bottled water, alcoholic
drinks, coffee and tea, energy drinks etc.
 The entrepreneur need to identify the type of
industry to enter to.
Products in the same industry directly compete
by influencing demand
 Cont…

There are three basic types of Industry analysis

1. Porter’s five forces analysis
2. Broad factor analysis; which involves the
political, economical, socio-demographic and
technological
3. SWOT analysis
 Porter’s Five forces model
POTENTIAL
ENTRANTS

Threat of new
entrants

INDUSTRY
Bargaining power COMPETITORS Bargaining power
of suppliers of buyers
Bargaining power
of BUYERS
SUPPLIERS

Rivalry among
existing firms

Threat of substitute new

products or services

SUBSTITUTES

Competitive Strategy, Porter, M.E., McMillan, 1980

B) Market Analysis: knowing who are your
customers 7Ps (Pdt/svs; Place; Promotion;
Price; People; Process: Physical evidence)

C) Financial Analysis: check about investment

outlay and cost of the project; means of
financing; projected profitability; break- even
point; cash flows of the project; investment
worthiness judged in terms of various criteria of
merit; and projected financial position.
D) Technical analysis: deals about inputs, process
and outputs
 Input Analysis: identification, quantification and
evaluation of project inputs, that is, machinery
and materials.
 Process Analysis: production/operations that you
would perform on the inputs to add value (e.g.
facility location, layout, quality controls, etc)
 Output Analysis: product specification in terms of
physical features color, weight, length, breadth,
height; functional features; chemical material
properties; as well as standards to be complied
with such as industry level standard and country
level standard.
26
E) Economic analysis: is the study of costs- and-
benefits (Overall costs to benefits)
F) Ecological Analysis: environmental concerns such as
pollutions, wastes, damage caused by the project to
the environment …
G) Legal and Administrative Analysis: being sure about
the administrative and legal issues involved in the
business project which is going to be selected.
 These include, choice of the form of business ownership,
registration and clearances and approvals from the
diverse authorities.
 The findings of the feasibility analysis may be
compiled in a project report.
 And then registration should take place and submitted in a
prescribed form.
 In addition, documents such as the memorandum of
association or the contract of partnership; A notice published
in a news paper announcing the establishment of the
business organization.
 5. Report Preparation
It is a written document that describes step-by-
step, the strategies involved in starting and
running a business.
 USERS OF A BUSINESS PLAN
The users of a business plan will vary based on its
function.
The business plan has two major functions,
1st it provides a clearly articulated statement of
goals and strategies for the entrepreneur and
those called as internal users (Firm’s
management/entrepreneurs & Employees)
2nd it serves as a selling document to be shared
with outsiders those called as outside users such
as investors, customers, suppliers, government
officials, lenders (banks, micro financing
institutions) and interested parties.
29
 Essential Components of Business Plan
1. Cover Sheet: Cover sheet is like the cover page of the book.
It mentions the name of the project, address of the
headquarters (if any) and name and address of the promoters.
2. Executive Summary: Executive summary is the first
impression about the business proposal. As the saying goes,
the first impression is the last impression.
3. The Business: This will give details about the business
concept.

4. Funding Requirement: Since the investors and financial

institutions are one of the key bodies examining the business
plan report and it is one of the primary objectives of
preparing the business plan report, a careful, well-planned
funding requirement should be documented.
5. The Product or Services: A brief description of
product/services is given in this subsection.
- It includes the key features of the product, the
product range that would be provided to the
customers and the advantages that the product holds
over and above the similar products/ substitute
products available in the market. It also gives details
about the patents, trademarks, copyrights, franchises,
and licensing agreements.
6. The Plan: Now the functional plans for
marketing, finance, human resources and
operations are to be drawn.
A. Operational Plan:
It would give information about
(i) Plant location:
(ii) Plan for material requirements, inventory management
and quality control are also drawn for identifying
further costs and intricacies of the business.
B. Marketing Plan
 Pricing
 Distribution (Place)
 Promotion
 Product forecasts
 Controls
C. Organizational Plan
 It indicates the pattern of flow of responsibilities
and duties amongst people in the organization,
 It provides details about the manpower plan that
would be required to put life into the business
and
 It would also enlist the details about the laws
that would be governed in managing the
employees of the organization.
 Identification of partners or principal share
holders
 Authority of principals
 7. Critical Risk
 Evaluation of weakness of business
 New technologies
 Contingency plans
8. Financial Plan
Pro forma income statement
Cash flow projections
Pro forma balance sheet
Break-even analysis
Sources and applications of funds
 9. Exit Strategy:
 It provide details about how the organization would
be dissolved,
 what would be the share of each stakeholder in case
of winding-up of the organization.
 It further helps in measuring the risks involved in
investing.
10. Appendix
 Letters from customers
 Market research data
 Leases or contracts
 Price lists from suppliers

sample Business plan Format

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