ELEMENTS OF A BUSINESS PLAN

Now that you understand why you need a business plan and you've spent some time
doing your homework gathering the information you need to create one, it's time to roll up your
sleeves and get everything down on paper. The following pages will describe in detail the seven
essential sections of a business plan: what you should include, what you shouldn't include, how
to work the numbers and additional resources you can turn to for help. With that in mind, jump
right in.

Components of a Business plan

Title Page and Content
1. Executive Summary
2. Business Description
3. Market Strategy
4. Projecting Market Share
5. Positioning Your Business
6. Pricing Strategy
7. Distribution Strategy
8. Promotion Plan
9. Financial Planning
10. Sales Potential
11. Competitive Analysis

I. Executive Summary
Within the overall outline of the business plan, the executive summary will follow the title
page. The summary should tell the reader what you want. This is very important. All too often,
what the business owner desires is buried on page eight. Clearly state what you're asking for in
the summary.
The statement should be kept short and businesslike, probably no more than half a page. It
could be longer, depending on how complicated the use of funds may be, but the summary of a
business plan, like the summary of a loan application, is generally no longer than one page.
Within that space, you'll need to provide a synopsis of your entire business plan. Key elements
that should be included are:

1. Business concept. Describes the business, its product and the market it will serve. It
should point out just exactly what will be sold, to whom and why the business will hold a
competitive advantage.
2. Financial features. Highlights the important financial points of the business including
sales, profits, cash flows and return on investment.
3. Financial requirements. Clearly states the capital needed to start the business and to
expand. It should detail how the capital will be used, and the equity, if any, that will be
provided for funding. If the loan for initial capital will be based on security instead of
equity, you should also specify the source of collateral.
4. Current business position. Furnishes relevant information about the company, its legal
form of operation, when it was formed, the principal owners and key personnel.
 5. Major achievements. Details any developments within the company that are essential to
the success of the business. Major achievements include items like patents, prototypes,
location of a facility, any crucial contracts that need to be in place for product
development, or results from any test marketing that has been conducted.

When writing your statement of purpose, don't waste words. If the statement of purpose is
eight pages, nobody's going to read it because it'll be very clear that the business, no matter what
its merits, won't be a good investment because the principals are indecisive and don't really know
what they want. Make it easy for the reader to realize at first glance both your needs and
capabilities.

II. Business Description

Tell Them All About It
The business description usually begins with a short description of the industry. When
describing the industry, discuss the present outlook as well as future possibilities. You should
also provide information on all the various markets within the industry, including any new
products or developments that will benefit or adversely affect your business. Base all of your
observations on reliable data and be sure to footnote sources of information as appropriate. This
is important if you're seeking funding; the investor will want to know just how dependable your
information is, and won't risk money on assumptions or conjecture.
When describing your business, the first thing you need to concentrate on is its structure. By
structure we mean the type of operation, i.e. wholesale, retail, food service, manufacturing or
service-oriented. Also state whether the business is new or already established.
In addition to structure, legal form should be reiterated once again. Detail whether the
business is a sole proprietorship, partnership or corporation, who its principals are, and what they
will bring to the business.
You should also mention who you will sell to, how the product will be distributed, and the
business's support systems. Support may come in the form of advertising, promotions and
customer service.
Once you've described the business, you need to describe the products or services you intend
to market. The product description statement should be complete enough to give the reader a
clear idea of your intentions. You may want to emphasize any unique features or variations from
concepts that can typically be found in the industry.
Be specific in showing how you will give your business a competitive edge. For example,
your business will be better because you will supply a full line of products; competitor A doesn't
have a full line. You're going to provide service after the sale; competitor B doesn't support
anything he sells. Your merchandise will be of higher quality. You'll give a money-back
guarantee. Competitor C has the reputation for selling the best French fries in town; you're going
to sell the best Thousand Island dressing.

How Will I Profit?

Now you must be a classic capitalist and ask yourself, "How can I turn a buck? And why do I
think I can make a profit that way?" Answer that question for yourself, and then convey that
answer to others in the business concept section. You don't have to write 25 pages on why your
business will be profitable. Just explain the factors you think will make it successful, like the
following: it's a well-organized business, it will have state-of-the-art equipment, its location is
exceptional, the market is ready for it, and it's a dynamite product at a fair price.
If you're using your business plan as a document for financial purposes, explain why the
added equity or debt money is going to make your business more profitable.
Show how you will expand your business or be able to create something by using that
money.
Show why your business is going to be profitable. A potential lender is going to want to
know how successful you're going to be in this particular business. Factors that support your
claims for success can be mentioned briefly; they will be detailed later. Give the reader an idea
of the experience of the other key people in the business. They'll want to know what suppliers or
experts you've spoken to about your business and their response to your idea. They may even ask
you to clarify your choice of location or reasons for selling this particular product.
The business description can be a few paragraphs in length to a few pages, depending on
the complexity of your plan. If your plan isn't too complicated, keep your business description
short, describing the industry in one paragraph, the product in another, and the business and its
success factors in three or four paragraphs that will end the statement.
While you may need to have a lengthy business description in some cases, it's our
opinion that a short statement conveys the required information in a much more effective
manner. It doesn't attempt to hold the reader's attention for an extended period of time, and this is
important if you're presenting to a potential investor who will have other plans he or she will
need to read as well. If the business description is long and drawn-out, you'll lose the reader's
attention, and possibly any chance of receiving the necessary funding for the project.

III. Market Strategies

Define Your Market

Market strategies are the result of a meticulous market analysis. A market analysis forces the
entrepreneur to become familiar with all aspects of the market so that the target market can be
defined and the company can be positioned in order to garner its share of sales. A market
analysis also enables the entrepreneur to establish pricing, distribution and promotional strategies
that will allow the company to become profitable within a competitive environment. In addition,
it provides an indication of the growth potential within the industry, and this will allow you to
develop your own estimates for the future of your business.
Begin your market analysis by defining the market in terms of size, structure, growth
prospects, trends and sales potential.
The total aggregate sales of your competitors will provide you with a fairly accurate estimate
of the total potential market. Once the size of the market has been determined, the next step is to
define the target market. The target market narrows down the total market by concentrating on
segmentation factors that will determine the total addressable market--the total number of users
within the sphere of the business's influence. The segmentation factors can be geographic,
customer attributes or product-oriented.
For instance, if the distribution of your product is confined to a specific geographic area, then
you want to further define the target market to reflect the number of users or sales of that product
within that geographic segment.
Once the target market has been detailed, it needs to be further defined to determine the total
feasible market. This can be done in several ways, but most professional planners will delineate
the feasible market by concentrating on product segmentation factors that may produce gaps
within the market. In the case of a microbrewery that plans to brew a premium lager beer, the
total feasible market could be defined by determining how many drinkers of premium pilsner
beers there are in the target market.
It's important to understand that the total feasible market is the portion of the market that can
be captured provided every condition within the environment is perfect and there is very little
competition. In most industries this is simply not the case. There are other factors that will affect
the share of the feasible market a business can reasonably obtain. These factors are usually tied
to the structure of the industry, the impact of competition, strategies for market penetration and
continued growth, and the amount of capital the business is willing to spend in order to increase
its market share.

Projecting Market Share

Arriving at a projection of the market share for a business plan is very much a subjective
estimate. It's based on not only an analysis of the market but on highly targeted and competitive
distribution, pricing and promotional strategies. For instance, even though there may be a sizable
number of premium pilsner drinkers to form the total feasible market, you need to be able to
reach them through your distribution network at a price point that's competitive, and then you
have to let them know it's available and where they can buy it. How effectively you can achieve
your distribution, pricing and promotional goals determines the extent to which you will be able
to garner market share.
For a business plan, you must be able to estimate market share for the time period the plan
will cover. In order to project market share over the time frame of the business plan, you'll need
to consider two factors:
Industry growth which will increase the total number of users. Most projections utilize a
minimum of two growth models by defining different industry sales scenarios. The industry sales
scenarios should be based on leading indicators of industry sales, which will most likely include
industry sales, industry segment sales, demographic data and historical precedence.
Conversion of users from the total feasible market. This is based on a sales cycle similar to a
product life cycle where you have five distinct stages: early pioneer users, early users, early
majority users, late majority users and late users. Using conversion rates, market growth will
continue to increase your market share during the period from early pioneers to early majority
users, level off through late majority users, and decline with late users.
Defining the market is but one step in your analysis. With the information you've gained
through market research, you need to develop strategies that will allow you to fulfill your
objectives.

Positioning Your Business

When discussing market strategy, it's inevitable that positioning will be brought up. A
company's positioning strategy is affected by a number of variables that are closely tied to the
motivations and requirements of target customers within as well as the actions of primary
competitors.
Before a product can be positioned, you need to answer several strategic questions such as:

a. How are your competitors positioning themselves?

b. What specific attributes does your product have that your competitors' don't?
 c. What customer needs does your product fulfill?

Once you've answered your strategic questions based on research of the market, you can then
begin to develop your positioning strategy and illustrate that in your business plan. A positioning
statement for a business plan doesn't have to be long or elaborate. It should merely point out
exactly how you want your product perceived by both customers and the competition.

Pricing Strategy
How you price your product is important because it will have a direct effect on the success of
your business. Though pricing strategy and computations can be complex, the basic rules of
pricing are straightforward:

1. All prices must cover costs.

2. The best and most effective way of lowering your sales prices is to lower costs.
3. Your prices must reflect the dynamics of cost, demand, changes in the market and
response to your competition.
4. Prices must be established to assure sales. Don't price against a competitive operation
alone. Rather, price to sell.
5. Product utility, longevity, maintenance and end use must be judged continually, and
target prices adjusted accordingly.
6. Prices must be set to preserve order in the marketplace.

There are many methods of establishing prices available to you:

 Cost-plus pricing. Used mainly by manufacturers, cost-plus pricing assures that all costs,
both fixed and variable, are covered and the desired profit percentage is attained.
 Demand pricing. Used by companies that sell their product through a variety of sources
at differing prices based on demand.
 Competitive pricing. Used by companies that are entering a market where there is
already an established price and it is difficult to differentiate one product from another.
 Markup pricing. Used mainly by retailers, markup pricing is calculated by adding your
desired profit to the cost of the product. Each method listed above has its strengths and
weaknesses.

Distribution Strategy
Distribution includes the entire process of moving the product from the factory to the end
user. The type of distribution network you choose will depend upon the industry and the size of
the market. A good way to make your decision is to analyze your competitors to determine the
channels they are using, then decide whether to use the same type of channel or an alternative
that may provide you with a strategic advantage.

Some of the more common distribution channels include:

 Direct sales. The most effective distribution channel is to sell directly to the end-user.
 OEM (original equipment manufacturer) sales. When your product is sold to the
OEM, it is incorporated into their finished product and it is distributed to the end user.
  Manufacturer's representatives. One of the best ways to distribute a product,
manufacturer's reps, as they are known, are salespeople who operate out of agencies that
handle an assortment of complementary products and divide their selling time among
them.
 Wholesale distributors. Using this channel, a manufacturer sells to a wholesaler, who in
turn sells it to a retailer or other agent for further distribution through the channel until it
reaches the end user.
 Brokers. Third-party distributors who often buy directly from the distributor or
wholesaler and sell to retailers or end users.
 Retail distributors. Distributing a product through this channel is important if the end
user of your product is the general consuming public.
 Direct Mail. Selling to the end user using a direct mail campaign.

As we've mentioned already, the distribution strategy you choose for your product will be
based on several factors that include the channels being used by your competition, your pricing
strategy and your own internal resources.

Promotion Plan
With a distribution strategy formed, you must develop a promotion plan. The promotion
strategy in its most basic form is the controlled distribution of communication designed to sell
your product or service. In order to accomplish this, the promotion strategy encompasses every
marketing tool utilized in the communication effort. This includes:

 Advertising. Includes the advertising budget, creative message(s), and at least the first
quarter's media schedule.
 Packaging. Provides a description of the packaging strategy. If available, mockups of
any labels, trademarks or service marks should be included.
 Public relations. A complete account of the publicity strategy including a list of media
that will be approached as well as a schedule of planned events.
 Sales promotions. Establishes the strategies used to support the sales message. This
includes a description of collateral marketing material as well as a schedule of planned
promotional activities such as special sales, coupons, contests and premium awards.
 Personal sales. An outline of the sales strategy including pricing procedures, returns and
adjustment rules, sales presentation methods, lead generation, customer service policies,
salesperson compensation, and salesperson market responsibilities.

IV. Sales Potential

Once the market has been researched and analyzed, conclusions need to be developed that
will supply a quantitative outlook concerning the potential of the business. The first financial
projection within the business plan must be formed utilizing the information drawn from
defining the market, positioning the product, pricing, distribution, and strategies for sales. The
sales or revenue model charts the potential for the product, as well as the business, over a set
period of time. Most business plans will project revenue for up to three years, although five-year
projections are becoming increasingly popular among lenders.
When developing the revenue model for the business plan, the equation used to project sales
is fairly simple. It consists of the total number of customers and the average revenue from each
customer. In the equation, "T" represents the total number of people, "A" represents the average
revenue per customer, and "S" represents the sales projection. The equation for projecting sales
is: (T)(A) = S
Using this equation, the annual sales for each year projected within the business plan can be
developed. Of course, there are other factors that you'll need to evaluate from the revenue model.
Since the revenue model is a table illustrating the source for all income, every segment of the
target market that is treated differently must be accounted for. In order to determine any
differences, the various strategies utilized in order to sell the product have to be considered. As
we've already mentioned, those strategies include distribution, pricing and promotion.

V. Competitive Analysis
Identify and Analyze Your Competition
The competitive analysis is a statement of the business strategy and how it relates to the
competition. The purpose of the competitive analysis is to determine the strengths and
weaknesses of the competitors within your market, strategies that will provide you with a distinct
advantage, the barriers that can be developed in order to prevent competition from entering your
market, and any weaknesses that can be exploited within the product development cycle.
The first step in a competitor analysis is to identify the current and potential competition.
There are essentially two ways you can identify competitors. The first is to look at the market
from the customer's viewpoint and group all your competitors by the degree to which they
contend for the buyer's dollar. The second method is to group competitors according to their
various competitive strategies so you understand what motivates them.
Once you've grouped your competitors, you can start to analyze their strategies and identify
the areas where they're most vulnerable. This can be done through an examination of your
competitors' weaknesses and strengths. A competitor's strengths and weaknesses are usually
based on the presence and absence of key assets and skills needed to compete in the market.
To determine just what constitutes a key asset or skill within an industry, David A. Aaker in
his book, Developing Business Strategies, suggests concentrating your efforts in four areas:

 The reasons behind successful as well as unsuccessful firms

 Prime customer motivators
 Major component costs
 Industry mobility barriers

According to theory, the performance of a company within a market is directly related to the
possession of key assets and skills. Therefore, an analysis of strong performers should reveal the
causes behind such a successful track record. This analysis, in conjunction with an examination
of unsuccessful companies and the reasons behind their failure, should provide a good idea of
just what key assets and skills are needed to be successful within a given industry and market
segment.
Through your competitor analysis, you will also have to create a marketing strategy that will
generate an asset or skill competitors don't have, which will provide you with a distinct and
enduring competitive advantage. Since competitive advantages are developed from key assets
and skills, you should sit down and put together a competitive strength grid. This is a scale that
lists all your major competitors or strategic groups based upon their applicable assets and skills
and how your own company fits on this scale.
 VI. Create a Competitive Strength Grid
To put together a competitive strength grid, list all the key assets and skills down the left margin
of a piece of paper. Along the top, write down two column headers: "weakness" and "strength."
In each asset or skill category, place all the competitors that have weaknesses in that particular
category under the weakness column, and all those that have strengths in that specific category in
the strength column. After you've finished, you'll be able to determine just where you stand in
relation to the other firms competing in your industry.
Once you've established the key assets and skills necessary to succeed in this business
and have defined your distinct competitive advantage, you need to communicate them in a
strategic form that will attract market share as well as defend it. Competitive strategies usually
fall into these five areas:

Product
Distribution
Pricing
Promotion
Advertising

Many of the factors leading to the formation of a strategy should already have been
highlighted in previous sections, specifically in marketing strategies. Strategies primarily revolve
around establishing the point of entry in the product life cycle and an endurable competitive
advantage. As we've already discussed, this involves defining the elements that will set your
product or service apart from your competitors or strategic groups. You need to establish this
competitive advantage clearly so the reader understands not only how you will accomplish your
goals, but also why your strategy will work.

VII. Design and Development Plan

What You'll Cover in This Section
The purpose of the design and development plan section is to provide investors with a
description of the product's design, chart its development within the context of production,
marketing and the company itself, and create a development budget that will enable the company
to reach its goals.

There are generally three areas you'll cover in the development plan section:

Product development
Market development
Organizational development

Each of these elements needs to be examined from the funding of the plan to the point
where the business begins to experience a continuous income. Although these elements will
differ in nature concerning their content, each will be based on structure and goals.