Guide to business planning, the book for anyone involved in business planning

Guide to
Business
Planning
Guide to Business Planning
© Guide to Business Planning
A selection of some concepts
commonly used in business planning
From “The Guide to Business Planning”
By Graham Friend and Stefan Zehle

0
Brand perception vs. what customers think is important
Guide to
Business
Planning
Customer Rating of Brand
ImportancetoCustomer
Reallocate
ExploitFix
Ignore
reliable
good coverage
understands my needs
friendly people
value for money
has a shop near me
innovative
many services
understands the country
makes charitable contributions
has many tariff options

Guide to
Business
Planning
-400
-300
-200
-100
0
100
200
300
400
500
600
700
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
US$'0000
Free Cash Flow
During Year Cumulative
Free cash flow J-curve or hockey stick curve and its uses
0
The J-curve
Pay-back in year 5
Peak funding in year 3
This chart shows the free cash flow for a
project or new business on a year by year
basis (blue bars) and the cumulative free
cash flow (orange line).
The cumulative free cash flow is the cash
flow for each year added year after year. The
cumulative free cash flow line has the shape
of the letter J and hence is referred to as the
J-curve. Americans tend to call it the “hockey
stick curve”

Guide to
Business
Planning
Defining free cash flow
Total Revenue
Gross Profit
Operating Profit or EBITDA
Free Cash
Flow
Cost of
Sales
Cost of
Sales
Operational
Expenditure
Cost of
Sales
Operational
Expenditure
Capex
Cash
Taxes
Free cash flow is not
the same as profit
Capital expenditure
does not hit the P&L

Guide to
Business
Planning
The Boston Consulting Group Box or Growth - Share Matrix
Relative Market Share
High Low
MarketGrowth
HighLow
Star
Cash Cow
Problem Child
Dog
The growth-share matrix allows you to
visualise which products within a portfolio
are cash generating and which products are
cash absorbing. This is helpful to
understanding:
 where resources should be allocated to
change the strategic position of products
 and which products should be divested.
The matrix relates market growth to relative
market share. Depending on the position of
the products they are classified as stars,
problem children, dogs or cash cows.
.The purpose of the matrix is to analyse a firm's product portfolio, where the term product
portfolio refers to a portfolio of Strategic Business Units (SBU). The objective of the analysis
is to gain strategic insight as to which products require investments, which should be
divested and which are sources of cash. It illustrates that if a business pays out too much
cash to investors it will not retain sufficient funds to invest in future growth areas.

Guide to
Business
Planning
Porter’s five forces
The Five Forces were Porter’s
conclusions on the reasons for
differing levels of competition, and
hence profitability, in differing
industries. They are empirically
derived, i.e. by observation of real
companies in real markets, rather
than the result of economic
analysis.
Porter’s Five Forces model is a
useful generic structure for
thinking about the nature of
industries. The definition of an
industry is as follows: “The group
of firms producing products that
are close substitutes for each
other” Michael Porter – Competitive
Strategy
Threat of
New Entrants
Threat of
Substitutes
Rivalry Among
Existing Firms
The strength of the five forces will determine the level of
profit within an industry that a competitor can expect to make
Power of
Customers
Power of
Suppliers

Guide to
Business
Planning
Business Planning Process Map
Stakeholder Analysis
Vision, Mission and Goals
Analysis of the Firm Environmental Analysis
Industry & Competitor Analysis
Market & Customer Analysis
Strengths Opportunities
Weaknesses Threats
Generate Strategic Options
Market Planning Market Forecasting
Operational Plan
Model the Business
Evaluate and Select Strategy
Risk Analysis
Identify the relative power and influence
of key stakeholders
This may be an input into or an output of
the business planning process
The firm and the environment in which it
operates are analysed
The industry value chain is defined and
the competitors identified and analysed
The products, the portfolio and the
product life cycle are considered
The analytical phases populate the
classic SWOT matrix
A range of strategy formulation models
can be deployed to highlight options
The options are translated into a
provisional marketing plan and forecast
To generate financial plans the
operational plan is also developed
The marketing and operational plans
are combined in a financial model
Evaluation criteria are applied to each
option
The preferred options are subject to risk
analysis
StrategicMarketingOperational&Financial
Product & Portfolio Analysis
The business planning
process outlined here is
suitable for small and
large businesses or
projects within a large
business. What varies is
the level of detail. For
example with a small
single business, you
would not carry out a
portfolio analysis
because there is only on
product or service

Guide to
Business
Planning
Resource-based view of sustainable competitive advantage
Key Resources
Tangible
Assets
Intangible
Assets
Capa-
bilities
Value
Barriers to
Duplication
Appropriability
Sustainable
Competitive
Advantage
Value to Customers
Superior
Performance
- Market Performance
- Customer
Performance
Management Strategic Choices
- Resource Identification
- Resource Development / Protection
- Resource Deployment
The objective of strategic planning is to achieve, sustain and enhance the competitive advantage. Within an industry some businesses
are more successful than others because they have resources that are inherently different from those of their competitors, who
furthermore cannot easily acquire these resources. Businesses should therefore try to acquire or develop such unique resources in order
to attain competitive advantage.
This framework looks rather conceptual, but it provides a useful structure to develop your thinking, even for a small business. For
example, if a coffee shop occupies a particular space where many of people pass each day, no competing coffee shop can occupy
exactly the same space.
Source: Fahy, J. and Smithee, A., “Strategic Marketing and the Resource Based View of the Firm”, Academy of
Marketing Science Review, Vol. 1999, No. 10, 1999

Guide to
Business
Planning
Economies of scale and scalability
Business A Business B
Revenue 10,000 12,000 10,000 12,000
Revenue Growth % 20% 20%
Cost of Sales (Variable) (2,000) (2,400) (6,000) (7,200)
Gross Margin 8,000 9,600 4,000 4,800
Gross Margin % 80% 80% 40% 40%
Operating Costs (Fixed) (6,000) (6,000) (2,000) (2,000)
Operating Profit 2,000 3,600 2,000 2,800
Operating Profit % 20% 30% 20% 23%
Operating Profit Growth % 80% 40%
Business A has high level of fixed
costs relative to variable costs and
experiences a disproportionate
change in profits for a given change
in revenue compared to Business B
which has a lower level of fixed cost
relative to variable costs. Business A
experiences excellent economies of
scale, whereas B does not.
For business A fixed costs (6,000)
amount to 75% of total costs (2,000 +
6,000). For business B fixed costs
(2,000) account for only 25% of total
costs. Revenue for both business A
and B increases by 20%. As a result
the operating profit for A increases by
80% whereas it only increases by
40% for B. This is the effect of
economies of scale. As business A
grows in scale, it is becoming rapidly
more profitable.
For example, operating a shop with a
fixed rent and staff costs becomes
very profitable as sales increase. Of
course the effect works in reverse if
sales decline.
A revenue increase of 20%
delivers an increase in operating
profit (EBITDA) of 80%
A revenue increase of 20%
delivers an increase in operating
profit (EBITDA) of 40%

Guide to
Business
Planning
Free Cash Flow is not the same as profit, an illustration
$ Company A Company B
Cash in bank at start of year 10,000 10,000
Revenue (sales) during year 20,000 20,000
Cost of sales & opex (15,000) (15,000)
Operating profit 5,000 5,000 5,000 5,000
Capital expenditure 0 10,000 (10,000)
Cash in bank at end of year 15,000 5,000
The operating profit for companies A and B are the same, i.e. the companies are equally profitable. However,
company B had old production equipment which had to be replaced during the year resulting in $10,000 of capital
expenditure (capex). Therefore the cash at bank at the end of the year is $5,000 lower than at the start. In contrast for
company A the bank balance at the end of the year is $ 5,000 higher than at the start of the year. Company A
generated $5,000 in of cash. Company B was $5,000 cash flow negative.
A situation could even arise where a company is profitable, but cash flow negative because capital expenditure
exceeds operating profit or EBITDA. Indeed this is quite common for businesses which require heavy investment in
fixed assets. Therefore always take a close look at the cash flow statement.

Guide to
Business
Planning
The Value Chain
A principal use of value chain analysis is to identify a strategy mismatch between different elements of the value
chain. If a company competes on the basis of low costs, then every part of the value chain should be geared towards
low cost. For example, low-cost airlines have looked at every aspect of the value chain and taken out costs at all
stages. Bookings are taken only via the internet rather than through travel agents; seats cannot be reserved; there are
no paper tickets, free meals and drinks, or lounges; and flights depart from secondary airports with lower landing fees.
The value is also useful in conjunction value add analysis, i.e. how much value is added by the different activities that
go into the final product. A particular activity may have lower return on capital employed than the average return on
capital employed for the company as a whole. For example, a manufacturing business has a return on average capital
employed (ROACE) of 18%. Part of its operation is a chain of retail outlets. The ROACE from retailing is only 10%.
The business could decide to withdraw from retailing and sell off the shops, thus releasing capital and generating a
higher ROACE for the remaining business. The value chain can also be used to examine outsourcing decisions.
Inbound
Logistics
Ope-
rations
Outbound
Logistics
Marketing
& Sales
Service
Procurement
Firm Infrastructure
Human Resource Management
Technology Development
Margin
The concept of the value
chain developed by Michael
Porter,, is used in most
businesses. Managing the
value chain can produce
competitive advantage and
increase returns. While it
may appear a little dated in
its original form, the concept
is valid and is a useful tool to
analyse your business. Porter, M.E., Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985

Guide to
Business
Planning
The Value System
The “value system” is also referred to as the “industry value chain”. In contrast to the “value chain”, which considers
value added within a business, the value system extends the value chain beyond the boundaries of the business and
recognises that a business is dependent on relationships with suppliers and buyers . The term value system
underlines the fact that activities are not necessarily organised in a linear fashion, but viewing the activities that make
up the final product as a chain is also useful and underlines the linkage between the concept of the “value chain” and
the “value system”.
Competitors may have organised their value chain differently, for example they may have a lower degree of
integration. For example, a mobile phone operator may have its own retail outlets, thus ensuring that the services can
be sold directly to consumers. A competing operator without its own retail outlets will have to ensure adequate levels
commission are paid in order to ensure that independent retailers sell its service. In the first case costs are fixed
whereas in the latter case costs are variable but there is lack of control. In formulating your company’s strategy, the
costs, rewards and risks of different strategies should be analysed carefully.
Analysis of the value system may reveal that a source of competitive advantage for your business could be a better
selection of suppliers, for example suppliers that have a labour cost advantage. Make or buy decisions are affected by
a downstream analysis of the value system, and the distribution strategy can be optimised by understanding the
distribution value chain.
Porter, M.E., Competitive Advantage, 1985
Supplier
value
chains
Firm value
chain
Channel
value
chains
Buyer value
chains

Guide to
Business
Planning
Selling vs. Marketing, what is the difference?
A central aspect of any business plan is the marketing strategy. To develop a marketing strategy, the market and
potential customers must be analysed. Marketing differs from selling in as much as marketing has a customer rather
than product focus. This means that customer needs should be analysed with a view to segmenting the market on this
basis. From this flows the targeting of particular segments with a segment-specific marketing mix. This positions
products in the market, based on an understanding of buyer needs, attitudes and behaviour.
Consider a manufacturer of simple plastic bags. The bags are cheap and undifferentiated and profit can only come
through volume. In contrast a handbag, such as the Hermes Birkin bag, may cost US$ 30,000 or more. Clearly
Hermes does not generate profit from selling lots of them, but Hermes makes profits from its ability to charge a very
high price for a product which meets the (rather exclusive) needs of the target market.
Kotler, P., Marketing Management, Prentice Hall, 1997
Production Products
Selling and
promotion
Profit through
sales volume
Target market
Customer
needs
Integrated
marketing
Profit through
customer
satisfaction
Starting Point Focus Means End
The Selling
Concept
The
Marketing
Concept

Guide to
Business
Planning
The Product Life Cycle
Markets for products or services usually grow in an s-shaped manner and eventually decline to be replaced by new
products. This s-shaped curve is referred to as the product life cycle if it relates to products or the industry life cycle if
it relates to a whole industry and can be described in terms of the number of users, unit sales or market value.
Introduction: Sales volumes
are low and increase in a
near linear fashion. There
are few competitors, the
product may suffer from
quality problems and there is
little variety between different
versions of the product. Unit
costs and prices are high
Accelerating Growth
Phase: Buyer groups widen
and sales increase rapidly.
More suppliers enter the
market and prices start to
fall. A greater variety of
product forms start to
appear.
Decelerating growth phase: The market is still
increasing, but at a declining rate. Prices are falling
quicker and become a significant issue. Variety
increases further and there is an increased focus
on product quality. Late adopters buy the product.
Maturity: When the market is
no longer increasing. There
may be consolidation. Prices
are declining further, but at a
slower rate.
Decline: Prices are
low, but no longer
declining. Some
competitors may
exit the market
Introduction
Accelerating
Growth
Maturity
Decline
Time
MarketRevenue
Decelerating
Growth

Guide to
Business
Planning
The Ansoff Matrix or Market Options Matrix
Market Penetration
 Consolidation
 Market penetration
 Sell more of the same to
the same market
Product Development
 Sell new services or
products to existing
customers
 With existing capabilities
 With new capabilities
Market Development
 New segments
 New territories
 New uses
Diversification
 Related
 Unrelated
NewExisting
Products
ExistingNew
Markets
HighLow
ScopeforLeverage
High Low
Scope for Leverage
A business can be developed in
four possible directions:
1. Market penetration, i.e. sell
more of the same to the same
market
2. Product development, i.e. sell
new products to existing
customers
3. Market development, seek out
new markets for existing
products
4. Diversification, i.e. sell new
products to new groups of
customers
With all development strategies
the question of leverage of core
competencies or resources is
key. The scope for leverage is
highest for a market penetration
strategy and lowest for an
unrelated diversification strategy.

Guide to
Business
Planning
The Industry Life Cycle
Introduction
Growth
Maturity
Decline
Time
TotalIndustryRevenue
Industries evolve over time, both structurally and in terms of overall size. The industry life cycle is measured in total
industry sales and the growth in total industry sales. The industry structure and competitive forces that shape the
environment in which businesses operate change throughout the life cycle. Therefore a business's strategy must
adapt accordingly. It is useful to consider the evolution of the industry life cycle in the context of Porter’s 5 Forces.
The industry life cycle is not the same as the
product life cycle (see 013 Product Life Cycle),
because within an industry there is a constant
updating of products. For example TV
manufacturers first produced monochrome TVs,
then colour TVs and subsequently home
entrainment systems. Within the colour TV
segment, the screen technology has evolved from
cathode ray displays to flat screens such as plasma
screens. Recently the first 3D TVs and Internet
enabled TV sets appeared on the market.
However, eventually some industries may contract
sharply and even disappear. For example
passenger sea transport (other than cruising) has
been replaced by air travel; photo-chemical
photography has been replaced by digital
photography; video rental shops are being replaced
by digital downloads or video on demand.

Guide to
Business
Planning
Visit the Website
www.guidetobusinessplanning.com
To get any new business idea off the ground or develop
and better manage an existing business you must have a
plan - and if you need to raise finance to fund the
business or get the approval of senior management, it
must be a convincing plan. The Economist Guide to
Business Planning is suitable for small businesses and
large companies alike and covers every aspect of
preparing and using a business plan. The guide contains
comprehensive coverage of business planning and
analysis techniques.
• tools for analysing the market, customers,
competitors, and the business environment
• techniques for examining and choosing between
alternative strategic options
• how to analyse and mitigate risk
and explains:
• how to identify the business's financing needs and
select the appropriate type of finance
• how to use the book's business plan document
template to write your own plan.

Guide to
Business
Planning
• Industry and competitor analysis
• Product and portfolio analysis
• SWOT analysis
• Generating strategic options
• Market analysis and strategy
• Market forecasting
• The operational plan
• Model the business
• Accounting principles
• Completing the financial statements
• Reviewing the financial statements
• Evaluating strategic options
• Funding issues
• Risk analysis
• Presenting the business plan and obtaining approval
• Implementing the business plan
Covering all Aspects of Business Planning
This book is designed for those with an inspired idea who
wish to translate it into a successful new business or
incorporate it in an existing business and those who wish
to adopt a planned approach to managing and
developing an existing business. Any investor or those in
an existing business with responsibility for approving new
initiatives will invariably insist upon seeing a business
plan before they approve any investment. The business
plan also provides the blueprint for successfully creating
and running the new venture. This book describes a
business planning process that will support the
preparation of a compelling business plan and the
creation and development of a successful business.
Following an introduction, the book has chapters on:
• The business plan
• The business planning process
• Strategic planning
• Analysing the environment
• Analysing the firm

Guide to
Business
Planning
Awarded "Outstanding Academic Title of 2009"
Although this work is positioned as a book about writing
business plans, Friend and Zehle, business consultants,
ended up writing an excellent summary of an
undergraduate business curriculum. Their volume
contains little new material that cannot be found in other
business plan books. What it does instead, and what it
does very well, is summarize multiple textbooks' worth of
information into a single book. The material is laid out
consistent with the US Small Business Administration's
suggested business plan outline, and each section is
concise. The best chapter, "Market Forecasting,"
provides excellent tools from which to choose. For an
entrepreneur who has not had a business education, this
book provides concise, informative tactics. For
undergraduate business majors, it organizes and
summarizes several course concepts very well and will
serve as an excellent business reference to consult after
graduation. It differs from other business plan texts (e.g.,
Successful Business Planning for Entrepreneurs by Jerry
Moorman and James Halloran, 2005), with its emphasis
on specific tactics to employ in a business plan.
Summing Up: Highly recommended. Upper-division
undergraduate students and practitioners. -- J. J. Janney,
University of Dayton
Choice, the US academic book reviewers, included the
"Guide to Business Planning" authored by the Directors
of Coleago Consulting, Graham Friend and Stefan Zehle,
in their list of "Outstanding Academic Titles, 2009
(Business and Economics).”

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