Sunday, 21 October 2007

Components of a Business Plan

It is difficult to prescribe an exact template or framework for a business plan as so much depends on the purpose and audience for which it was prepared. For example, a business plan prepared for when seeking start-up funding from a venture capitalist would be quite different to a business plan used for management and control within an established organisation. However, it is possible to describe the basic components of a business plan.
The main categories of these would include:
  1. The organisation's vision, mission and values
  2. Analysis
  3. Plan
  4. Key Risks
  5. Organisation and Resources
Each of these are considered below.

The organisation's vision, mission and values

These define the basic purpose and parameters of existence for the organisation.
Often a statement of vision OR mission is sufficient (as opposed to having both).
Where the organisation is not a completely stand-alone entity, the vision, mission and values should reflect the context of the parent structure. The more stand-alone the organisation is, the more important it is that the vision and mission reflect a uniquely differentiated competitive position.

Analysis

The analysis should cover both the external competitive environment, as well as internal factors.
Factors to consider in the external competitive environment include the current situation, recent changes and anticipated changes with regard to
  1. The relative negotiating power and interests of external entities such as customers, suppliers, regulators, government and lobbying groups.
  2. The level and nature of competitiveness within the industry, for example
    1. the number of competitors and/or level industry fragmentation, and
    2. the bases of competition, for example price, innovation, customer segmentation, distribution relationships, etc.
  3. The threat of product or service substitution or becoming obsolete.
  4. The threat of new entrants into the market, which would probably include an analysis of the barriers to entry.
Scenario planning is a useful technique for external analysis where there is a lot of structural uncertainty in the competitive environment.
Internal factors would include, strengths, weaknesses and flexibility with regard to:
  1. Systems, including computer and manual systems, process, procedures and policies,
  2. Staff, skills, knowledge / intellectual property and organizational capabilities, and
  3. Culture, organizational style and structure.
The external and internal analyses are often combined and summarized in a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis.
You might also include an Options Analysis, where a number of options were considered before deciding on a way forward (and/or where it is important to argue and/or justify the option(s) carried forward into the plan). Typically you would evaluate each option in terms of:
  1. Robustness in the face of the external analysis (including multiple scenarios, if you have done scenario planning),
  2. The organisation's ability to deliver it, given its strengths and weaknesses,
  3. Fit to the vision, mission and values of the organisation or its parent context, and
  4. Financial value of the option (as per a Discounted Cash Flow or similar analysis)

Plan

Based on the analysis, the plan itself is then articulated in terms of:
  1. Initiatives or tasks: what will be done and by when, including what the output or deliverable of the task will be, and, depending on the plan's audience and purpose, who will do it. A stylized or simplified Gantt chart is often a useful way of communicating this. (S.M.A.R.T.) objectives or outputs of the plan. I find it useful to consider 4 types of objectives:
    1. Financial objectives such as shareholder returns, (working) capital efficiencies, margins, funding, etc.
    2. Market share and/or customer experience objectives,
    3. Process performance and efficiency objectives, and
    4. Organisational capability, staff, skills, systems and cultural objectives.
    The objectives should reflect the specifics of the strategy, rather than generic industry benchmarks.
  2. A budget or forecast showing how the plan plays out. I find it most useful to consider this as a forecast of the balance sheet and income statement for the organization, including relevant key non-financial indicators such as head count. Typically one might, for example, do this on a monthly basis for the first 12 months, and on an annual basis for the subsequent 4 years. The structure of this should reflect the underlying economics of the business model so that meaningful sensitivity test can be run. The inputs to the sensitivity tests should be consistent with the uncertainties identified in the Analysis or in the Key Risks, and the outputs should be consistent with the stated Objectives.

Key Risks

Ideally, the Key Risks should follow naturally from the Analysis. More importantly in this section you would highlight the plans and governance you will put in place to manage these risks.

Organisation and Resources

An organigram or biographies of key players is often useful. This might include significant external players or other divisions within a group.