The essential role of a business plan for the start-up entrepreneur
A robust business plan will give your start-up the greatest chance of success. This blog explores the business plan's role and the process of shaping a start-up’s strategy in response to environmental and competitive forces. Written by ABE marker, Rajesh Raheja, who has an MBA, 25 years’ business experience and who is a regular contributor to our members magazine Focus.
Online start-ups are giving a serious challenge to male grooming giant, Gillette. In the past five years Gillette’s market share in the US has declined from a phenomenal 71 per cent to 58.5 per cent. The $50 billion male grooming market has long been sterile. Now it is witnessing disruption. Two online start-ups have challenged Gillette’s domination: Dollar Shave Club (DSC) and Harry’s.
As digital technology ushers in the era of e-commerce, the disruption of established industries is becoming more commonplace. The internet is offering entrepreneurial start-ups a more level playing field against larger established competitors. This new reality is not lost on individuals with entrepreneurial vision.
It could be easy to conclude that online start-ups can effortlessly challenge market leaders. However, it is not as simple. The advent of the internet has not changed the principles of entrepreneurship. A start-up – whether it is launched as an online enterprise or a brick-and-mortar venture – is still beset by uncertainty and ambiguity. The failure rate for technology led start-ups is a staggering 90 per cent and therefore on par with small businesses in other sectors. However, the entrepreneur can mitigate the risk of failure by creating a business plan.
A business plan is a blueprint of success and best practice in the entrepreneurial process. It is a document that explains the business model and the strategic and operational plans in great detail.
The importance of a written business plan
A business plan is the entrepreneur’s perspective of the strategic and operational aspects specific to their start-up. It is a roadmap with which the entrepreneur aims to build the start-up into a stable, sustainable and scalable business. A written business plan is indispensable if the entrepreneur is seeking finance from external sources. Banks, angel investors and venture capitalists will be wary of investing money into a start-up unless they have the means to evaluate the risks and growth potential. Therefore, a sensibly documented business plan can help both, the entrepreneur and the potential investors.
A business plan is created in a particular template. Its contents are divided into sections. The opening sections give information about the start-up that includes the name, the entrepreneur’s vision and the start-up’s objectives, legal status of the venture (sole trader/partnership/company), current operational status, a brief profile of the members of the management team. The subsequent sections include a comprehensive strategic analysis and strategic plan, detailed plans on marketing and operations, followed by financial data, financing alternatives and risk analysis.
A good business plan begins with ‘an executive summary’, which is a well thought out synopsis of all sections articulated in no more than four pages. An executive summary communicates that the product/service being offered by the start-up will serve an identifiable and sizeable market segment. It discusses the expected return on investment and the growth potential over a period of 3–5 years. The verbal information is supported with numbers, and as a result, acts as a summary capable of capturing the imagination of potential investors, who are typically hard-pressed for time.
The importance of a business model
A business model gives a clear idea about the way in which a business aims to deliver ‘value to customers at an appropriate cost.’
The online business model offers many choices to entrepreneurs. Some of these are: e-retailer; e-auctions’ and third-party marketplaces – a web-based platform which connects buyers with sellers. For instance, just eight years ago Uber adopted the third party marketplace model to transform the taxi industry. As a result the firm got an immense competitive advantage as a start-up and used it to penetrate the market. Without doubt, the firm’s ‘clicks only’ model is one of the most innovative business models in recent years.
The importance of strategy
Strategy is vital to achieving business goals. A sound business plan must discuss its intended strategy and the action to realise this strategy. It discusses how the start-up plans to integrate its tangible and intangible resources with the business opportunity with the aim to gain sustainable competitive advantage. For example, a start-up’s intangible resources such as its capacity for innovation and way of interacting with its customers and suppliers could be a highly effective route to success in a market that suffers from an indifferent monopoly. Dollar Shave Club, which has a direct-to-consumer subscription model and high quality customer service, is a good example.
Entrepreneurs should not only be visionary but also discerning. They seize opportunities and craft strategies based on a combination of personal instincts and careful analysis of data. Strategic analysis involves analysis of information on:
- the PESTEL forces
- the industry structure
- potential customers’ expectations.
High quality newspapers, government reports, trade bodies and financial statements of public companies are good sources of vital information. However, sound strategy cannot emerge from one-sided analysis that stops short of evaluating threats and weaknesses. For example with the application of Porter’s five forces framework, the online fashion entrepreneur will understand that most traditional high-street rivals are brands that are recognised globally, and many are giants with healthy cash reserves. Organisations such as H&M, Zara, Burberry, Marks and Spencer, Levi Strauss and Primark, among others, have decades of experience in managing their value chain activities (see fig. 1). In the past few years, almost all of them have invested heavily in creating online infrastructure that operates 24x7. Therefore, even if the entry barriers seem low, the rivalry within the industry is intense and perpetual. This has a negative effect on profitability potential, and leaves little room to a start-up for strategic manoeuvrability.
A robust business plan articulates the business level strategy (see fig. 2) distilled from such analysis. This may allow the entrepreneur to discover a niche. Dollar Shaving Club experienced success by focusing on the niche comprised of men averse to shopping on the high street.
A business plan should explicitly justify the start-up’s strategy and support it with detailed marketing and operational plans. It should explain how the start-up’s value chain activities - supply chain management, operations, distribution, marketing and sales and after-sales service – will be managed to deliver value and satisfaction to its customers. A venture performs well when it manages to create a distinct value chain that delivers superior value with lower costs.
The Internet has infused dynamism into the marketing and customer relationship functions. In the digital economy, consumer behavior is much more transparent. For instance, transactions between the start-up and its customers generates data on a constant basis. At the same time, social media facilitates interactivity and instant feedback. The marketing plan should emphasise the ways in which it will exploit the new dynamics to build brand loyalty.
The importance of financial data
A start-up’s growth strategy is incomplete without financial data. This distinct section of a business plan covers:
- break-even analysis;
- the income statement (also called the profit and loss account);
- the balance sheet (also called the statement of financial position);
- the cash flow statement;
- financial ratios.
Information presented should demonstrate that the start-up is structured efficiently.
Cash and profit are oxygen for business. Operations cannot be sustained without liquidity, and expected return on investment cannot be achieved without profit. A start-up cannot survive on owner’s capital and borrowed funds forever. Financial forecasts should communicate the timeline in which the start-up expects to generate revenue, in excess of its costs, and build up cash.
It is generally understood that a start-up may be in loss for the initial couple of years while revenue picks up but is inadequate to cover the fixed costs. However, a viable venture should be capable of exhibiting profit and consistent cash flow from third year onwards. Assumptions used in conceiving financial data should be reasonable and explicitly presented. The performance should be accentuated by reviewing the financial data with the help of established financial ratios such as: liquidity and solvency ratios, efficiency ratios and profitability ratio.
Writing a business plan prior to the launch of a start-up is the best practice that can produce positive outcomes for the entrepreneur. A written business plan is a pre-requisite for obtaining finance from banks and other investors.
It is perhaps rightly argued that the environment in which a start-up begins its journey is dynamic, and therefore capable of turning even a well-meaning action plan into an ineffectual enterprise. For this reason, a well thought out business plan is a document made in earnest, but is certainly not etched in stone. The onus of shaping the start-up’s strategy in response to environmental and competitive forces lies with the entrepreneur. A wise entrepreneur uses it as an instrument to assess and mitigate risks.
References & sources
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