The Business Plan PDF

The Business Plan Gerald Schwetje · Sam Vaseghi The Business Plan How to Win Your Investors’ Confidence With 39 Figures and 25 Tables 123 Dipl.-Kfm. Gerald Schwetje Hamburger Beratungs-Kontor GmbH & Co. KG Neue ABC-Str. 8 20354 Hamburg Germany [email protected] Dr. Sam Vaseghi (Dipl. mult.) Deloitte Environment & Sustainability Weidekampsgade 6 2300 Copenhagen S Denmark [email protected] Translation from German by Paula and Susanne Schwetje Library of Congress Control Number: 2007932195 ISBN 978-3-540-25451-5 Springer Berlin Heidelberg New York This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. Springer is a part of Springer Science+Business Media springer.com © Springer-Verlag Berlin Heidelberg 2007 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Production: LE-TEX Jelonek, Schmidt & Vöckler GbR, Leipzig Cover-design: WMX Design GmbH, Heidelberg SPIN 11412335 42/3180YL - 5 4 3 2 1 0 Printed on acid-free paper Preface The business plan is a versatile means and is not only restricted to start-ups or company founders. Big companies have more or less large staff divisions which have the task of thinking about strategic questions and their orientation in order to work out the plans for the next years. What does this look like in mid-size or small companies, which cannot afford their own staff divisions or planning departments to compile and plan their strategy. In such a case it is the manager’s or entrepreneur’s task to develop a strategy, to define future plan data and to implement them. Many mid-size or small companies fail, because they recognize market developments too late, because they do not promote the right products, because they have not thought about certain technological processes, because they have not adapted their organization in time. Many reasons can be named why such companies fail. In a successful company business and strategic situations are thought about continually and decisions are made early enough in order to act successfully within the market. We believe the business plan to be a means for mid-size and small companies of thinking about their company and positioning it correctly within the market. More and more do small and midsize companies also have to compete and view their markets from a global perspective. Only someone who has prepared himself thoroughly for this step stands a chance within the tough competition. This book has helped many companies within the German market to think about their company and to position it correctly. That is the reason why we have decided to offer it on the international market as well. We believe it will encourage small and mid-size entrepreneurs to work out a strategic plan that will enable them to be successful within the market, also within the global market. With this book we do not simply wish to introduce you to the theme of drawing up a business plan, we also wish to offer you a “book of thoughts”, which – with all its questions – will motivate you to think about your company, to write down your ideas and plans and with these to find suitable strategies for making your company competitive. VI Preface This book could only be compiled with untiring effort of those people who helped us to translate and shape it. We are particularly thankful to Paula and Susanne Schwetje who spent many hours of their free time devoting their energies to translating the book. We also wish to thank AnnaKatharina Wenzel, who gave excellent support in correcting and completing the book. Last but not least, we would like to thank our families, who gave us the time to let this book become reality. Hamburg, June 2007 Kopenhagen, June 2007 Gerald Schwetje Sam Vaseghi Preface to German edition Due to the globalization of business activities and the internationalization of the capital markets, demands on internal and external company reporting have increased, primarily the reporting of future chances and risks has taken an outstanding position in this context. Against this background the publicity policies of a company have to be adjusted to structure the information conveyed with financial accounting and other media in such a way that the addressees (e.g. shareholders, investors, suppliers, creditors, employees, tax authorities, analysts, publicity) act in accordance with the set company goals. Thereby those responsible for such information policies should align their activities to the goal of increasing the company value (value reporting). In this context the business plan presents an indispensable instrument of reporting, with which essential qualitative and quantitative company information can be documented for investors in a compact form, information regarding existing growth or risk potentials, beyond annual financial statement and report. The script at hand gives an extensive overview about the goals, concepts and instruments of an effective business plan. The practise oriented remarks are supported by a multitude of illustrative examples. The drawing up, using and updating of a business plan is clarified with know-how but easy language to founders of new businesses and managing directors of mid-size companies with respect to the latest knowledge in business studies. I wish the excellent handbook a high circulation and the readers success when realizing the recommended strategies and concepts. Hamburg, December 2003 o. Univ.-Prof. Dr. Carl-Christian Freidank, Tax adviser Table of contents Preface....................................................................................................... V Preface to German edition.................................................................... VII 1 Necessity of planning.......................................................................... 1 1.1 1.2 1.3 1.4 1.5 2 Business plan project.......................................................................... 9 2.1 2.2 2.3 2.4 2.5 3 External use of a business plan.................................................... 1 1.1.1 Venture-capital financing................................................ 2 1.1.2 Financing by bank credits............................................... 2 1.1.3 Strategic alliances........................................................... 3 1.1.4 Mergers and acquisitions................................................ 3 1.1.5 Customer and marketing relations.................................. 3 Internal use of the business plan.................................................. 4 Basic types of business plans...................................................... 4 1.3.1 Short business plan.......................................................... 4 1.3.2 Extended business plan................................................... 5 1.3.3 Operational business plan............................................... 5 Why managers don’t write business plans.................................. 5 Key questions.............................................................................. 6 Data collection........................................................................... 13 Initial analysis of the data.......................................................... 16 Partial plans............................................................................... 16 Financial plan and control......................................................... 17 Key questions............................................................................ 18 Executive summary.......................................................................... 21 3.1 3.2 3.3 3.4 Key to an effective executive summary.................................... 22 Executive summary and the business plan................................ 24 Advantages of an executive summary....................................... 26 Key questions............................................................................ 27 X Table of contents 4 Business idea and strategic goals..................................................... 29 4.1 4.2 4.3 4.4 5 Management team and organization.............................................. 41 5.1 5.2 5.3 5.4 5.5 5.6 5.7 6 6.2 6.3 6.4 Product features......................................................................... 59 6.1.1 Unique selling propositions.......................................... 59 6.1.2 Auxiliary services......................................................... 60 Product description.................................................................... 60 Product portfolio and product plan............................................ 61 Key questions............................................................................ 63 Market and competition................................................................... 65 7.1 7.2 7.3 7.4 8 Operational structure................................................................. 41 Organizational structure............................................................ 46 Personnel planning.................................................................... 50 Management team..................................................................... 52 Reporting systems..................................................................... 52 Legal form................................................................................. 55 Key questions............................................................................ 55 Products and services....................................................................... 59 6.1 7 Business idea............................................................................. 29 Business model.......................................................................... 31 Strategic goals........................................................................... 33 4.3.1 Vision............................................................................ 34 4.3.2 Mission.......................................................................... 35 4.3.3 Company goals.............................................................. 36 Key questions............................................................................ 38 Market....................................................................................... 65 7.1.1 Description of relevant market...................................... 65 7.1.2 Market segmentation..................................................... 66 7.1.3 Market growth............................................................... 69 Competition............................................................................... 70 Market position......................................................................... 71 Key questions............................................................................ 72 Marketing and sales.......................................................................... 75 8.1 Marketing.................................................................................. 75 8.1.1 Marketing strategy........................................................ 75 8.1.2 Marketing plan.............................................................. 76 Table of contents 8.2 8.3 9 XI 8.1.3 Pricing policy................................................................ 76 8.1.4 Advertising and sales promotion................................... 79 8.1.5 Marketing organization................................................. 79 Sales.......................................................................................... 80 8.2.1 Sales strategy................................................................ 80 8.2.2 Sales organization......................................................... 80 8.2.3 Sales plan...................................................................... 82 Key questions............................................................................ 84 Research and development.............................................................. 87 9.1 9.2 9.3 Presentation of research and development................................ 87 Development plan...................................................................... 90 Key questions............................................................................ 90 10 Production......................................................................................... 93 10.1 Outline of production................................................................ 93 10.2 Production plan......................................................................... 95 10.3 Key questions............................................................................ 95 11 Procurement and logistics................................................................ 99 11.1 Purchase.................................................................................... 99 11.2 Logistics.................................................................................. 101 11.3 Key questions.......................................................................... 105 12 Finance............................................................................................. 107 12.1 Presentation of financial situation........................................... 107 12.2 Financial data system.............................................................. 108 12.3 Analysis of economic development......................................... 110 12.3.1 Key questions.............................................................. 116 12.4 Company’s future development.............................................. 118 12.4.1 Planning the sales........................................................ 119 12.4.2 Cost planning.............................................................. 123 12.4.3 Planning the balance sheets and the P&L................... 130 12.4.4 Planning the cash flow................................................ 136 12.5 Sensitivity and risk analysis.................................................... 138 12.5.1 Key questions.............................................................. 139 12.6 How finance experts rate planning.......................................... 142 12.6.1 Margins....................................................................... 142 12.6.2 Asset management...................................................... 142 12.6.3 Company valuation..................................................... 143 XII Table of contents 12.7 Financing request.................................................................... 143 12.7.1 Key questions.............................................................. 145 12.8 Repayment and exit-strategy................................................... 145 13 The way to the investor.................................................................. 147 13.1 Planning the financial strategy................................................ 147 13.1.1 What is your company’s position?.............................. 148 13.1.2 A realistic business plan.............................................. 148 13.1.3 Identifying the financing options................................ 149 13.2 Preparing for the funding process........................................... 150 13.2.1 Presenting the organizational structure....................... 150 13.2.2 Assessment of the business model.............................. 151 13.2.3 Validation of the financial package............................ 151 13.3 Involve the investor................................................................. 151 13.3.1 Shopping a deal........................................................... 152 13.3.2 Negotiating details...................................................... 152 13.3.3 “Close, collect and reflect”......................................... 153 Key performance indicators................................................................. 155 List of abbreviations.............................................................................. 161 List of figures.......................................................................................... 163 List of tables........................................................................................... 165 Further reading...................................................................................... 167 About the authors.................................................................................. 181 1 Necessity of planning A business plan, in principle, can be seen as a document that commercializes your business idea as a whole towards potential investors and stakeholders. A business plan is successful if you succeed in conveying to the reader the most significant opportunities and growth capacities of your company realistically. A business plan should justify and describe your business idea and further business development in a clear and adequate manner. It should not merely aim at emphasizing the strengths of the company, but rather at presenting a realistic portrait of its problems, risks and obstacles. In addition to this, appropriate solutions should be proposed and discussed in detail. A business plan can be used for specific purposes. One target might be to obtain new means of investment for the development of a product or the marketing of a new product. Basically a successful business plan has three important features: The short- and long-term objectives are clearly depicted, a careful description is given of how the objectives can be achieved in realistic general conditions and a description is given of how the realization of the plan will meet the expectations of the investors. It is very important to clarify beforehand what purpose a business plan will serve and what it aims at. In general business plans are compiled either for an external or internal reason. In the following chapter we will describe these facts in more detail. 1.1 External use of a business plan From an external point of view the business plan represents the main financing tool of your company. In addition, it serves to secure existing or planned business relations between your company and your stakeholders. 2 1 Necessity of planning Depending on the type of financing and stakeholder relations, various aspects are weighed up and dealt with in different ways in a business plan. 1.1.1 Venture-capital financing As a rule, venture-capital and private-equity investors nowadays only consider business cases which are well represented by a business plan. When reading a business plan, the investors are primarily interested in good and relevant arguments that promise business growth. Furthermore, investors attach great importance to how and in which period of time a return on investment will be realized, for instance: through operating profit or by going public or by merger and acquisition or through a repurchase by the management. In order to guarantee a high return on investment, investors pay great attention to: the company’s success on the market, the feasibility of the plan in order to achieve its business objectives, the unique selling proposition of the products and services and the quality and experience of the management team. 1.1.2 Financing by bank credits When granting credits, investment banks focus on one main question: when and how the repayment of the credits and interests will be made. In order to minimize risks, banks usually ask for securities. That is why credit applications addressed to banks should provide more than a list of current and past annual accounts. Moreover, banks will also ask to what extent the companies are prepared for possible setbacks, and how they will be able to overcome such critical situations. For these reasons banks more and more often demand professional business plans when considering applications for credits. Banks expect business plans to give qualified insight into: the enterprise strategy, the management, the organization, the market, the competitors, the products and the current and future financial and profit situation of the enterprise. 1.1 External use of a business plan 1.1.3 3 Strategic alliances The formation of strategic alliances by young and growing companies within the framework of research projects, product design, marketing, etc. is gaining increasingly in importance. A strategic alliance is usually the consequence of: financial backing or access to well-established distribution channels. Such an alliance may well succeed over several years for the benefit of all parties. The majority of companies, however, request a business plan before consenting to any long-term business relations or obligations within the framework of a strategic alliance. 1.1.4 Mergers and acquisitions Acquisitions present an alternative for company expansion, while selling a company may be seen as the way out of a solvency crisis. Companies that are looking for acquisition candidates usually request a detailed business plan that will support their evaluation and selection of the candidates. Similarly, the acquisition candidate himself will also be interested in the long-term plans of any acquiring company, in order to ensure and protect his own interests for the future. This information is also the subject-matter of a business plan. 1.1.5 Customer and marketing relations Winning a major customer or an agreement with a wholesaler is a particularly crucial step towards success for many growth companies. Most big companies, however, are very reserved and precautious before starting negotiations with rather small and unknown companies. In such cases, a convincing business plan may clear doubts and prove decisive for inspiring confidence, opening negotiations and making further decisions. Hence, business plans effectively help to open doors to potential customers, markets and suppliers. 4 1 Necessity of planning 1.2 Internal use of the business plan A business plan also serves as a valuable management tool from an internal viewpoint of the company. A systematically elaborated and regularly updated business plan, with a profound insight into all business matters, helps the management to efficiently plan the company’s development and prepare the necessary modification measures in a structured way. Such a business plan can serve as a guide to the daily decision-making and as a control tool in managing the current business. The joint realization of the business plan by the management team ensures an overall commitment to the company goals and controls. Achieving this commitment on the management level is most significant for the successful implementation of the plan. Business plans make a significant contribution to the development of companies which have branches in different locations. By using business plans for each branch, the top management can on the one hand guarantee site-related business planning and on the other hand, continually control performance as well as the attainment of the business objectives. Furthermore, the long-term objectives of the entire company can be balanced by these indicators. 1.3 Basic types of business plans For the majority of authors writing their first business plan, the question arises “How detailed should the business plan be?” To this question there is, unfortunately, no standard answer and no formula. It is entirely up to you how detailed your business plan should be, and depends solely on the purpose and necessity behind it, as well as on the complexity of your specific business. In general, one distinguishes between three basic types of business plans: the short business plan, the extended business plan and the operational business plan. In the following these three types are described. 1.3.1 Short business plan A short business plan is usually about 10 to 15 pages long. It is most suitable for young companies in an early stage of their development when, there still do not exist complex interrelations. 1.4 Why managers don’t write business plans 5 For a well-established company, a short business plan only makes sense if certain investment opportunities are to be roughly approved in advance, in order to prepare an extended business plan on the base of the short version later on. Even if it is a “short” business plan, the required information should be conveyed in a complete and appropriate manner. The final goal is to convince potential investors that you understand your entrepreneurial business and the market extremely well. 1.3.2 Extended business plan The extended business plan is usually about 20 to 40 pages long. This type of business plan describes the business issues of the company much more profoundly and more detailed than a short business plan would do. The higher the required capital, the more interesting this type of business plan becomes. If, for example, you require 5 million Euros outside capital for the construction of a new and innovative industrial plant, i.e. you are striving for long-term credits, the preparation of an extended business plan would be advisable. Such a business plan should contain a thorough market analysis and a revenue, cost and financial planning for a 5-year period. 1.3.3 Operational business plan For well-established companies a business plan can serve the management team as an important operative tool, say a business guideline. Such a plan not only serves as a draft for the entire business organization, but also ensures a consistent appreciation on the part of the entire management with respect to the strategic objectives. Indeed, operational business plans are very long and detailed, usually comprising over 40 pages, in some cases even exceeding 100 pages. 1.4 Why managers don’t write business plans The increasing importance of business plans in the business environment possibly results in a recurring solicitude and reservation of business managers towards this topic. Moreover, in attempting to represent a complex topic by means of an exclusive business language and terminology, business plans deter many managers due to their very “academic” appearance. 6 1 Necessity of planning But the aversion of many managers to business plans often is much more profound, namely that the description of the business objectives appears to be difficult and hardly suits their daily entrepreneurial activities. Basically, the elaboration of a business plan is a great deal of work and would mean an additional task for the management. However, in an efficient organization, this task is based on the careful fulfilment of managerial activities that are already in progress or ones that are imminent. Managers too often argue that the development of a business plan would be futile in recessionary times, since the market, i.e. the economic situation, changes rapidly and target specifications made by a business plan could be discarded overnight. From our experience, there are two important arguments against this: The whole development process of the “business plan project” is at least just as valuable as the final “business plan document”. The “business plan project”, of course, encourages the management to reconsider and update their business objectives with the help of company-wide facts and tendencies. In addition to this, much of the information gained throughout the project (e.g. benchmarks), serves as a very valuable source for the evaluation and control of the current and future performance of the company. The business plan should not in fact be regarded as an “untouchable codex”, which forbids and punishes any future course deviation along a multi-year plan. However, as a controlling tool, a business plan highlights such deviations from the planned course and also offers a sensitive and flexible framework for regularly updating the facts and figures. Such a tool allows you to quickly respond to market and economic changes in order to efficiently achieve your business goals. 1.5 Key questions What goals are you pursuing with your business plan? What purpose should your business plan serve? − Preparation for negotiations with banks − Presentation for investors − As an internal management tool 1.5 Key questions 7 What kind of financing are you striving for and how much capital do you require? Which target groups and people do you want to approach by means of your business plan? What expectations, needs and demands do your readers have? Which type of business plan will you choose and why? Are there any reasons why you would still prefer not to write a business plan? 2 Business plan project Although business plans vary in their structure and content, they all have some features in common: they propose and describe business models, products or services, describe their corresponding markets, ways of production and service delivery. Indeed, external addressees of business plans usually want to know: who the shareholders are, how much capital is required, how and for what purpose capital is utilized, which type of financing will be chosen, and in what period of time an adequate return on investment can be realized. Every business plan should clearly discuss these essential issues, and present them concisely and in a convincing way. The reader should be in a position to understand the business as a whole and to gain confidence in the company. In order to deal with these issues in a sophisticated and professional manner, it is wise to draw up your business plan within the framework of a company-wide project; this we call the “business plan project”. It is not advisable to start writing a business plan when you are still unprepared as regards organization and then to expect that everything will be compiled and explained by itself. Instead, sound project planning should precede the development of the business plan. As shown in figure 2.1 the business plan project is usually structured into five phases: Data collection Data analysis Design of the business plan 10 2 Business plan project data collection data analysis design of the business plan drawin-up of the business plan presentation of the business plan Fig. 2.1. Phases of the business plan project. Drawing-up of the business plan Presentation of the business plan. The business plan should be structured into clearly defined sections. These sections should show the different aspects of your business i.e. your company. The compilation of a structure forces the management to decide at an early stage of the process where the different topics should be positioned and discussed. Inappropriate structuring is a common weakness of many business plans. Furthermore, sophisticated structuring demands of the management to consider very carefully in advance how detailed the different sections of the business plan should be. In general, the sections of a business plan correspond to different business fields: Management and organization, Products and services, Market and competition, Marketing and sales, Research and development, Production, Procurement and logistics and Finances. Imagine that each of these sections or areas has its own partial business plan. Provided that data collection is carried out once over all areas at the beginning of the project, the process of compiling each partial plan would be sub-divided into four phases: Data analysis for a specific area, Design of the partial plan for a specific area, 2 Business plan project Management and organization 6 Products and services 7 Market and competition 8 Marketing and sales aales 9 Research and development 10 Production 11 Procurement and logistics 12 Finances V Presentation of the business plan 5 IV Creation of the partial plans Business idea and strategic goals III Drawing-up of the partial plans Data collection 4 II Data analysis I 11 Project management Fig. 2.2. The roadmap of the business plan project. Drawing-up of the partial plan for a specific area and Presentation of the partial plan for a specific area. In order to illuminate the process of the entire business plan project, a roadmap is illustrated in the figure 2.2. Herein the building blocks in the left column correspond to chapters 4 to 12 of this book. Starting with an overall data collection, the arrows point to the different project milestones. The Roman numbering of the columns refers to the project phases, whereas the Arabic numbering of the lines refers to the sections, respectively to the appropriate chapters of this book. 12 2 Business plan project Conclude that the respective blocks and stops are designated to: an Arabic number (chapter number) as well as a Roman number (project phase). For instance the designation (12-I) refers to the data collection phase (I) within the financial sector (Chapter 12). As soon as the structure of the business plan is completed, task groups should be defined which refer to the different areas, respectively sections (fig. 2.3). The structure of the task groups allows responsibilities to be assigned and roles to be defined. At the same time a project schedule should be drafted, where tasks and activities are assigned to time slots and appointments are fixed. the set up of a project team, the assignment of a project manager, the precise definition of all roles and responsibilities, the precise project and resources planning in order to facilitate a disciplined collaboration, assuring the quality of the entire process. Definition of work packages Definition of roles and responsibilities Assignment of tasks Drafting of a project schedule Drawing-up of a project plan Fig. 2.3. The development of the project plan. Before starting the project, the work packages, the activities and the responsibilities and timelines should be well communicated and covered by all project team members. This could be done by an opening meeting (kick off). Indeed, it is not recommended to engage external consultants for the preparation of a business plan. The engagement of external consultants, of course, may seem to save precious time, however, investors and analysts recognize quite quickly whether a business plan was written by an entrepreneur himself or by a professional consultant; they would usually prefer the former and reject the latter. Temporarily, however, independent con- 2.1 Data collection 13 sultants could be engaged for reviews in order to evaluate the plan or excerpts of it from the viewpoint of an independent expert. 2.1 Data collection An effective business plan requires a high data quality. In an overall company-wide action, all relevant data should be collected (Stops 11.I to 4.I of the roadmap in fig. 2.2) into one data pool. Whenever analysts and investors encounter essential information about your industry, your market or your technology, which has not been included in your business plan, you can be certain that they will doubt the reliability of the complete plan. The entire business plan project will run more effectively and faster, if data is collected in a structured way across all business areas. This approach would have the advantage that intermittent data completion during the subsequent project phases could be almost completely avoided. The basic data required for a business plan is represented by the listing below; of course the specific requirements of a company may vary from this and require reductions or further extensions. Company description Company name Legal form Location Date of foundation Company history Location of the subsidiaries Name of the shareholders Key financial data (e.g. revenue and profit of the last 3 years) Number of employees in the last 3 years Management team and organization Organization chart Key management and board of directors Age structure of the board members 14 2 Business plan project Company affiliation of the managers Responsibilities and competencies of the management team Key members of the employees’ committee Number of employees Compensation and other employee agreements Products and services Product catalogue − − − − Sales volume in the last 3 years Revenue in the last 3 years Costs in the last 3 years Profit margins in the last 3 years Product descriptions and technical specifications Planned product launches Advertising and promotion tools Pricing schedules Competitive advantages Unique selling propositions Patents, licenses and trademarks and their terms of use Regulations and industrial standards Market and competition Market size and social trends Customers and patterns of demand Results of customer satisfaction surveys Competitors Goals and strategies of the individual competitors Comparative advantages and disadvantages of your company in comparison with the main competitors Marketing and sales Information per product line 2.1 Data collection − − − − − 15 Market share in the last 3 years Planned sales volume (5 years) Planned revenue (5 years) Marketing costs Profit margins Marketing tools Structure of sales department Development and production Number of the production locations Number of workers in the last 3 years Applied manufacturing processes Alteration of the warehouse stocks in the last 3 years Share of development costs of the last 3 years’ turnover List of all product launches during the last 3 years Procurement and logistics Information about subcontractors − Coordinates − Name − Type of supplied goods Supplier contracts and agreements Name of logistics agents Development of the internal and external haulage of the last 3 years Finance Annual financial statements and controls of the last 3 years Financial planning, forecast, for the current year with all respective assumptions Required investments and timeline Credit lines Loan agreements Evolution of key performance indicators (KPIs) within the last 3 years 16 2.2 2 Business plan project Initial analysis of the data When data collection has been completed, a preliminary data analysis (stops to 4.II of the roadmap in fig. 2.2) would illuminate an overall portrait of your company and the current state of your business. The data raised in the different areas should be reviewed, structured and top-down analysed by the management team. Particular attention should be paid to the analysis of the current situation; this is the initial situation, which, of course, determines the future development of the company. This analysis should allow the management to found the business idea and plan the strategic goals at a pretentious level. We will come back to this issue in the chapter 4 of this book. The data analysis should also provide an estimate, whether the capacities and general resources for the realization of the business idea already exist or still have to be planned and developed. If the company does not exist yet, the initial data have to be partially gathered by external research, e.g. benchmarks etc. An important step within this phase is the preparation of a preliminary draft of the executive summary. On the basis of the collected data, the business idea, the planning of the strategic goals, as well as the content structure of the business plan, you would be able to draft your executive summary. This first draft could then be recurrently revised and improved during the next project phases in order to achieve a mature executive summary at the end of the project. It should be mentioned that although this type of approach diverges from the traditional procedure, where an executive summary is written at the end of the entire project, we encourage everybody to do so. This issue is discussed in chapter 3 of this book, where also the advantages of our approach are highlighted. 2.3 Partial plans In the next step the strategic plan, which determines both the core business idea as well as the strategic goals, should be communicated to the teams, which are responsible for the different sections and areas (stops 5.IV to 10.II of the roadmap in figure 2.2). The corresponding work packages will be delegated by the management toward the area managers, their project managers and task forces, who are responsible for working out the partial plans within a committed period of 2.4 Financial plan and control 17 time and delivering the final documents to the management in order to analyse the common financial impact. Within the framework of the business plan project you should organize workshops which facilitate a structured exchange of experience and knowledge between the different area teams and task forces. The efficient realization of the workshops is crucial for the harmonisation of the partial plans and the final success of the entire business plan project. The workshops make it possible to identify and coordinate interrelations and dependencies between different divisions. A good example of such a critical dependency is the relation between organizational planning and the different objectives of the other areas, e.g. marketing, production etc. All partial plans should be aligned to the strategic plan as communicated by the management. 2.4 Financial plan and control In further step the partial plans are compiled, consolidated and in their entirety examined in regard to financial impact and feasibility. On the basis of this consolidation a cross-functional financial plan could be created (stops 12.II to 12.IV of the roadmap in figure 2.2). The development of the financial plan is described in chapter 12. The financial plan has to be aligned with the objectives of the different areas as well we as with the strategic plan and goals. If the financial plan deviates from the strategic plan, the management must be informed immediately so that they are able to act quickly. In such a case two alternatives exist: The strategic plan cannot be kept partially and should be revised and adapted appropriately by the management. The partial plans or their interrelations do not allow an appropriate alignment with the strategic goals and should be revised by the task forces. This way of review gives rise to an iterative approach which can be controlled by the project management. The supervision by the management ensures a recurring improvement of the entire business plan (stops 4.I to 4.II of the roadmap in figure 2.2). Each iteration step is of course accompanied by a repeated revision and optimization of the executive summary (chapter 3). 18 2 Business plan project By means of these tactics you will finally achieve a mature and conclusive business plan. In addition, this procedure ensures that your business plan will communicate the core business idea, the strategic goals and objectives and the basics of the operative plans stepwise into your company organization. This process increases the willingness and motivation of the management as well as the employees with regard to the later realization of the resultant measures. 2.5 Key questions Have you identified the potential readers of the business plan and chosen a type of business plan that will fit their requirements? Have you already defined the sections of your business plan and the corresponding content structure? Have you already prepared the structure of the partial plans as well as the required data related to the sections? Have you prepared standardized document templates? Have you set up the roadmap for the preparation of your business plan? Have you already reached an agreement within the management team on research, preparations and feedback? Are the sections and the corresponding work packages well defined and represented? Are the roles and responsibilities within the framework of the project clearly defined and communicated? Are the most important project milestones well defined and a project plan set up? Have you planned sufficient time and resources for data collection and analysis in common agreement with the managers and project team members? Have you planned the necessary resources for the project? Have you carefully prepared the kick off meeting (agenda, topics, goals, participants, communication, etc.)? Have you defined the role of the consultants you wish to involve in your project? 2.5 Key questions 19 Which tasks and responsibilities of the project are addressed to you in person? What resistance will you encounter during enforcement of your project and its objectives on different hierarchy levels? Have you already elaborated an overall check list for data acquisition? Are external data sources also requested for your business plan? Which analysis tools (SWOT, brainstorming, portfolio, decision trees, fish diagrams, etc.) will you apply in order to analyse the overall data? Have you already developed a qualified concept for the workshops? If you are already in the second round of the project, which data were missing in the first round of the preparation of the executive summary and the business plan? 3 Executive summary The executive summary compiles the essential statements and conclusions of your business plan in a very concise form. For the majority of readers the executive summary will present the most important section of the business plan, because: it ensures a quick introduction into the main topics, it gives a short overview of your enterprise. it provides the investor with the core statements and conclusions of your enterprise strategy and success factors. Investors, bankers and representatives of investment groups get lots of business plans on their desks every day. Indeed, they may not read the whole documents. But they usually read the executive summary first, in order to quickly check, whether a review of the complete document would be worthwhile. Provided the executive summary sounds promising, the reader will feel encouraged to read the whole business plan. On the other hand, if the executive summary does not convince at first sight, even a good business plan could be rejected. Hence, avoid postponing the essential information to the later sections of your business plan, as most readers will not give you another chance if the main concerns are not already embodied in the executive summary. Figures and facts resulting from your data analysis (chapter 2) must be perfectly represented. Otherwise, readers will doubt and question the plausibility of your whole business plan. However, if you are reliant on estimated data in your executive summary, you should provide the investor with convincing arguments and clear formulations in order to avoid raising any kind of scepticism. 22 3 Executive summary 3.1 Key to an effective executive summary What makes an executive summary an effective tool? First of all, it is important to know that an executive summary does not serve as a preface or introduction to the business plan. It is rather the elaboration of an explicit summary of the entire business plan. The reader should be able to read and understand the executive summary independently of the rest of the business plan. The investor should understand the points of your business plan merely by reading the executive summary. The business plan Management and organization Marketing and Sales Business idea and strategic goals Research and Development Executive Summary Products and services Procurement and logistics Finances Market and competition Fig. 3.1. Information sources of the executive summary. An effective executive summary includes all the key elements of a business plan on just two or three pages. It should include the following essential information: An outline of the enterprise strategy with emphasis on the success factors: With your executive summary you provide the reader with a short survey of your strategic goals, your business idea (chapter 4) and key data relevant to success, e.g. revenue, profit and profitability (appendix 1) in the last three years, as well as your plan for the next five years. 3.1 Key to an effective executive summary 23 A presentation of the key qualifications of the management team which will guarantee the success of the company: Make sure that you describe the contribution your team will make to successful business initiatives. The investor is interested in the structure of your management team and their qualifications. A short description of the market, the success formula and unique selling propositions on the market: You must convince the investor that your products and innovations will prove to be competitive on the relevant market. Therefore, it is especially important to know your target market, its trends, the needs and preferences of your customers and the services provided by your competitors. A concise presentation of your competitive advantages: Show in brief with which strategies you operate successfully on your market and how you have already distinguished yourself from your competitors and intend to do so in future. Explain your operative strategies (manufacturing, procurement, logistics and marketing) to your investor in a few sentences. A short description of the products and services: Describe your products and services and thereby mention the essential features, in particular the unique selling propositions. It is also possible to first refer to the exceptional features in the choice and compilation of your product portfolio. Explain your production technology, product development and the arising expenses involved with them Reference to your communication methods: Briefly mention which communication methods you use to increase public awareness of the product and to position your product in the relevant market. Key financial data: Here you should give an insight into relevant financial data, e.g. annual revenue, sales volumes and costs for a period of three to five years. The description of your financial requirements: This demands an estimate of the required financial resources, an explanation of how you wish to use these, and how and when you will guarantee repayment to your investors. The structure and design of an effective executive summary is one of the most difficult tasks facing a manager when drawing up a business plan. 24 3 Executive summary Try in advance to show the reader your short-term and long-term company goals, or rather the success factors in your company. Using the system shown in figure 3.2., formulate which measures you will take to achieve these goals in your company. In phrasing the core statement, you should first define the goal i.e. the benefit for your company, and then coordinate the verb of action to your benefit. Subsequently, you should consider which measures have to be determined to achieve this benefit. Verb Expected benefit Actions & measures Maximise profit by raising sales volume Maximise profit by increasing prices Carry out cost reduction by adjusting the product-portfolio … … … Fig. 3.2. Basic scheme for the formulation of the key statements. 3.2 Executive summary and the business plan You cannot expect the first version of the executive summary, which you have worked out in an early phase of the project, to be the final one. You should be prepared to revise the executive summary after the first structuring of the business plan. In an early stage of developing the business plan the provisional version of the executive summary merely serves the following purposes: It serves as a conceptual guideline for the business plan. While developing the executive summary you will be forced to think about the most essential elements of the business plan more closely. Furthermore, you will have to assign priorities to your different aims, in other words to distinguish the important aims from the less important ones, because only the significant ones should be included in the executive summary. It creates self-confidence in yourself as well as confidence in your business plan. If you gather the key elements of your business plan carefully 3.2 Executive summary and the business plan 25 together within the framework of the executive summary, you will prevent writing blockades and delays from occurring at a later date, such blockades and delays that arise from repeatedly losing one’s bearings while developing the business plan. A brief collection of the most important points allows you to develop a feeling for the course and objectives. It involves the management team in the planning procedures right from the start. The drawing up of a first version of the executive summary is an effective way of integrating the members of the management team in the analyses. The joint forces of the management team ensure a valuable contribution to the content of the business plan as well as early agreement about the objectives. It leads to a better final product. Repeated writing is the key to successful writing. An executive summary, which sets the course for the elaboration of the whole business plan, should again be revised thoroughly at the end of the process. To draw a conclusion, the result would be a better business plan as well as a better executive summary. As soon as you have completely elaborated all the other components of the business plan, you should devote yourself to the executive summary again. First, make sure that the content and statements of the executive summary correspond with all the information and details of the other parts. Take heed of the points mentioned above. The next step is to question yourself if the executive summary shows clearly that: the business has been investigated and planned thoroughly, the business model is reasonable and useful, a sound understanding of the products’ and services’ contribution to the value has been created, your business plans do in fact produce competitive advantages, there exists a profound knowledge of the industry and the target markets, you and your team will tackle the business with enthusiasm, and a realistic picture of the business risks has been worked out. Provided you express these key messages powerfully and precisely together with the important content aspects previously described, the reader will get a profound understanding of your strategies, plans and goals. Figure 3.3 again sums up what you have to pay attention to when drawing up a convincing executive summary. 26 3 Executive summary Fig. 3.3. Main requirements of an executive summary. 3.3 Advantages of an executive summary An effective executive summary is supportive in two respects when seeking a funding source: It serves as a summary of the core statements of the business plan and defends the business idea. If your business plan is very long and detailed, it will be difficult to approach the reader directly. If you should send your business plan to credit granters or investors who do not know you and who perhaps have no immediate interest in your offer, it would then be more advisable to approach them with only the executive summary of your business plan and an accompanying letter for the time being. Should those who have any say in the matter be interested in the complete business plan after reading the executive summary, you could then forward or even present it to them personally. This procedure enables you not to reveal any confidential details of your business. The readers are involved. A clearly worked out and convincing ecutive summary will ensure that your business plan stands against the masses of other business plans, and will encourage reader to want to find out more about your company and what is hind your business idea. exout the be- 3.4 Key questions 3.4 27 Key questions Are all essential data and information available for a concise description of the key elements of your executive summary (budget, strategy, product, distribution etc.)? Have you formulated your business goals as precise core statements? Does your executive summary meet all formal, language and content requirements? If you are in the second round of the project, have you revised your executive summary in accordance with the first draft of your business plan? 4 Business idea and strategic goals 4.1 Business idea Every company emerges from a business idea; but a promising idea must be more than just a wish to sell products or services. One has to tackle a business idea intensively in order to advance it and make it a true business objective. In many conversations with entrepreneurs and founders we perceive again and again that the business idea is either described insufficiently or not at all. A good idea is far from being automatically a good business idea. We often find that scientists, for instance, being quite convinced of a discovery they have made, hardly ever have any idea of approaching the market. When considering business ideas, you should write these ideas down and try to define them in detail. In doing this, you should refer to further sources like magazines, the internet or interviews. You should discuss your idea with entrepreneurs or consultants who are well-known to you, in order to illuminate the idea from different perspectives. At this point you often realize that others have already taken up or even realized the idea. This often is the moment the idea is dismissed and disappears from the scene. It is a frustrating moment when you notice that the obstacle appears too high and the idea cannot be realized. You simply give up! This behaviour is understandable, but unfortunate and basically inconsequent: for it is precisely this obstacle that presents the first challenge, which leads you to continually develop your business idea. Do not allow yourself to give up your idea so easily and regain the conviction that you are pursuing an interesting idea. Think of all those shining examples that held on to their ideas firmly and without wavering. The brilliant inventor Gottlieb Daimler, for instance, was at first employed as a leading engineer by the then renowned gas engine manufacturer Deutz. He soon realized the enormous technical and economical potential of the four-stroke engine and looked for various means of applying it. To him it was not the engine itself that was the significant factor, but the diverse possibilities of employing it. In 1885 he developed the first motorcycle, in 1886 there followed a motorboat, his fa- 30 4 Business idea and strategic goals mous motor coach as well as further employment of the engine as a railcar or the controllable balloon driven by propellers. Daimler held his own against many odds, continued working consistently on his ideas and thus set the foundation stone of one of the most successful companies in Germany. Model entrepreneurs always succeed in their intentions against many odds through their pragmatic and critical insight, and they do not reap the fruits of their work, namely entrepreneurial success, until many years later. Business ideas emerge in many different ways. It may be a question of a new product, new rules in an existing business model, or only the imitation of other companies, taking advantage of discernible weaknesses. In order to make this clear, we will show you a further example. In the year 1836, after many years of experimenting, the joiner Michael Thonet devised the bending of wood by heating the wood in a glue bath. With this method he produced the chairs and armchairs made of curved wood, for which his company later became famous. Thonet was also one of the first entrepreneurs who put a stamp on the frames of his chairs in order to protect them against imitators. When twenty years later the chair making craft had become a chair manufacturing industry, the chairs received an emblem in the form of a sun with eight rays. Thus Thonet furniture became one of the first branded products. The idea of standardizing and industrializing craftsmen’s work was the idea that often stood at the beginning of successful enterprise stories and of trade development e.g. from tailoring to clothing brands, from the butcher's shop to the sausage factory, from the baker's shop to the breads and pastries concern, or from the sawmill to the prefabricated house manufacturer. Other successful business ideas existed and exist in: making brands out of anonymous products as foods, cosmetic articles, medicines; standardizing services and making them nationally available: all franchise retail systems, the cleaning of buildings, transport agencies, fast food chains; developing new technologies: substituting glass lenses with silicon ones, replacing beverage receptacles made of glass and tin with paper ones, using composites instead of steel, replacing tubes with flat screens and cable connections with radio networks, etc.; 4.2 Business model 31 offering products with little or no service included; all types of selfservice, cheap airlines; finding new markets or sales channels: direct marketing, food at service stations, market places and product auctions via internet; changing the production scale: carrying out only final assembly, purchasing product components; reducing the range of services – along the value-added chain: hiving off administration services, agreeing to alliances with competitors and hiving off production and logistics completely. The business idea can (or sometimes even has to) change in the course of time because the customers’ wishes change or because new technologies replace old procedures. The company Thonet, for instance, began with the additional production of tubular steel furniture after having come in contact with top designers of Bauhaus. 4.2 Business model Business ideas are developed by very different motivations. Many people may have ideas but only few accomplish the final realization of a business idea. Remember how Bill Gates, the founder of Microsoft, developed an operating system in his garage, unaware of the fact that his business idea would one day become a dominating product worldwide. His idea of developing an operating system did not mature to a business until IBM charged him with the development of an operating system for the IBM PC. Of course, IBM was his greatest coup. He thus found a customer who was ready to pay him a price for his services. His business idea and his customer secured him his turnover. This enabled Bill Gates to found his company Microsoft. His business model (fig. 4.1) resulted from the business idea and the revenue model. In order to develop a business model, you must consider from the very beginning who would be prepared to pay a price for your business idea. There are two conditions you have to check: what product or service justifies your business idea, and what revenue you can realize with your product or service. 32 4 Business idea and strategic goals Business idea Revenue model Products and services Market and customers Business model Fig. 4.1. The business model. When you have developed your business idea, you have to check if you can find a target customer who is prepared to pay a price for your services. Only then can you think about writing a business plan. That means you should consider your idea intensively. You should ask yourself: what business you run why you run it what advantage and benefit you offer how you distinguish yourself from your competitors which customers you want to attract which customer needs you fulfil and how what products you manufacture how you manufacture and distribute these products which profit and growth you aim at with which methods you want to achieve success When you have defined your business model, you should describe it briefly and precisely. Investors, through experience, will very quickly recognize the quality and substance of a business model. This is also valid for existing enterprises, as their business models also change and you constantly have to adapt to new challenges, too. 4.3 Strategic goals 4.3 33 Strategic goals Based on the business model, the company strategy can now be derived. This company strategy allows you to develop the strategic goals right up to the operational ones. First of all, describe your company model (fig. 4.2) by means of your business model, through which your products and your services can be defined. Then present your market and the customers to whom you want to sell your products and services. Remember that the target customers will only be willing to pay the price if products and services correspond to their benefit expectations. Furthermore, your products and services determine the tasks in your company. With them you will lay the foundations for calculating and planning your resources and costs. Customer needs Company Performance Market / Customers Access zu customers Customer value Fig. 4.2. The company model. The customer value is determined by the products and services you provide the customer with. Your products and services help the customer to fulfil a need. The customer value can also consist of a unique selling proposition or a significant economic advantage. A company strategy can be defined as the way to a destination that you as an entrepreneur define from the very beginning of your venture. In many middle class companies we are faced with the following situation: if we ask what they intend to do in the next three years, we are inundated with ideas and strategies; however, if we ask whether they have documented or communicated this in their company, we receive the simple answer, “We have this stored in our minds; we can’t possibly write it all down, since the markets change so quickly.” Here lies the crux of the matter! It would be much wiser to think over one’s business idea and the strategic direction of one’s company and set that down in a business plan. Remember, investors want to understand why 34 4 Business idea and strategic goals you run your business and why they are to invest in your company. Goals and strategies showing how the future business will be carried out are particularly important. The growth of an enterprise must be plausible from its historical beginning right into its future. In order to be able to develop goals and strategies, it is wise to know what you want; for only if you know what you want, can you formulate a strategic direction. Therefore, you should develop an idea of your future company outline. From a strategic point of view this is a vision, a longterm perspective. Long-term perspectives are always elusive, but one thing is sure: the world is changing and you want to make money with your business model in future, too. Hence it is important to think about this long-term perspective. On the basis of your vision, you define your business purpose, your mission. Only when you have done this, should you start formulating your strategic and operative goals. 4.3.1 Vision Let us begin with the long-term perspective: what do you want to achieve in 5 to 10 years. Develop a future picture of your enterprise. We do not want to open an academic discussion, but merely to emphasize the strengths of a vision. The French pilot, writer and visionary Antoine de Saint-Exupery, once described his vision of building a ship as follows: “If you want to build a ship, don't drum up people together to collect wood and don't assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” A vision describes the future picture of your enterprise. The vision must be desirable, challenging, but also attainable, otherwise, rather than strengthen creativity within your enterprise, it will cause frustration. Visions formulated clearly and simply will encourage the creativity of your people. Henry Ford was a visionary of his time, when he developed the “Model-T”. At that time many designing engineers worked on the development of cars, convinced of making money only with luxury cars and sports cars for the rich. Henry Ford thought differently and had a vision: developing a motor vehicle which, through standardization and mass production, could be offered so cheaply that affording a car became possible for many people. Nothing would divert Ford from this vision and he put it into practice. This was the birth of one of the world’s leading car manufacturers. Without visions enterprises, as a rule, fail at the slightest signs of change, or they decline into destructive compromises. 4.3 Strategic goals 4.3.2 35 Mission The vision delivers the “subject” of your enterprise. The mission describes the purpose of the enterprise, its strategies, behaviour patterns and values. In the so called mission statement you should briefly and precisely describe your company, explain what you would like to do and how you will be able to assert yourself in competition with other companies. In 1973, the probably most well-known international management guru, Peter Drucker, wrote in his management book “Tasks, Responsibilities, Practices” that the fact that an enterprise's purpose and task are rarely thought over in an adequate manner, might be the most significant reason for the failure and breakdown of a company. The task of an enterprise may lie in the manufacturing of products that provide benefits for a target group, for instance the production of Aspirin, or in the supply of services in health care, as for instance the medical services of a general practitioner. Describe your business purpose briefly and precisely, also what you are focusing on, and clearly define your tasks. The business purpose gives a third party insight into what you are aiming at. You should also point out in a mission statement, which strategic direction you are pursuing. Apart from the description of the original business purpose and the strategic direction, you should also formulate your company values. They give an insight into your enterprise culture and show how you intend to work together with those who are interested in your company. Not only investors are interested in this, but also shareholders, employees, directors, customers and suppliers. Just how strongly the code of conduct affects an enterprise can be shown by the example of IBM. Buck Rogers formulated the code of conduct of an IBM’er as follows, that everyone at IBM works in marketing and every employee is trained to respect the customer as the most important priority. Everyone means every one – beginning with the executive board via the finance department down to the reception and the employees in IBM production. Indeed IBM is one of the most successful sales organizations in the world. In 1914 Tom Watson, the founder of IBM, formulated a code of conduct that was clearly understandable for everybody, and with it defined the value system of IBM. The basic principles were as follows: Respect for the individual. Best possible service toward the customer. 36 4 Business idea and strategic goals Aiming at excellent performance. Even today IBM works and thinks according to these principles. 4.3.3 Company goals You have now formulated your vision and mission and know what you want. Hence it is time to derive clear goals from these, goals which you set and pursue, and which are understandable for a third party. Remember: if you know what you want, you can formulate your strategic direction and thus your goals. Strategic goals are usually targets you would like to achieve within the next 3 to 5 years. Such goals may be: profit revenue growth market shares specific customers or customer groups products and services product design production, capacities and locations investments suppliers Furthermore, your strategies, as well as your tactical objectives related to products, sales, development, production etc., are both based on your strategic goals (fig. 4.3). You should define your goals and targets by means of the following criteria: reasons for these goals and targets, height of these goals and targets, and time schedule for these goals and targets so that they can be checked at any time. 4.3 Strategic goals 37 Business idea Strategic goals Market position Key account Profit e.c. Divisional goals & strategies Market segments Sales Development Quality standards Delivery reliability e.c. Fig. 4.3. The target hierarchy in an enterprise. Table 4.1. Example for the definition of goals and targets. ZielGoal Description of the goals Zielbeschreibung Revenue Return on total sales as the sum of the project business‘ revenues, esspecially: Growth Measurement -€ 50 Mio - Thd. - Tbd. - € 200.00 - Annual Sales - Revenue report of S.A. - Revenue report of S.A. - Revenue report of E. - EBIT - EBIT of the industry -20% -Tbd. - Operational minimum project margins -Min. 30 % profit margin - Annual/quater/month P&L - Annual/quater/month P&L; analysis per industry - Project controlling - Total revenue - Revenue of the sales areas - Average revenue of the service areas - Average revenue per employee Profit Target value Profitability figures esspecially: Annual increase of the main business. figures, average growth (CAGR) over 5 years - Revenue - 35 % p.a. -P&L When you define targets, keep in mind that they should be realisable. Table 4.1 shows an example of how one can elaborate concrete target values and control instruments from the strategic goals. Your set of targets will now provide the framework for your business plan as described in the chapters 5 to 12. In each of the chapters the goals are adjusted to the historical evolution of the business and the future course of your business. 38 4 Business idea and strategic goals 4.4 Key questions What is your business idea? To what extent are your business ideas realistic and acceptable? What are your products and services? How can marketable products and services be derived from your business idea? How can your revenue model be described? How can your business model be described? How can your company model be represented? How can your business and enterprise model be checked? Have you already got a vision for your company? Have you already described a mission for your company? What are the purposes of your company? Why do you run your company? Which strategy do you pursue? How can you achieve strategic positions which will bring a competitive advantage for your company? Which values have you developed for your company? Are the values in accordance to your company strategy? Which code of conduct have you defined? Does the statement deliver a portrait of the company and match the company culture? Is the statement easily readable and intelligible? Which potential customers can you win? What do your customers require of your products and services? Are your customers willing to pay a price for your products and services? Do you know any customers with whom you could test and talk about the products? What are your strategic goals? 4.4 Key questions 39 Have you already reached a market share? Which one? What are your future ideas? Which size do you want to reach? Are your growth and profit targets realistic with regard to the market trends and your competitors? What distinguishes your business model from that of your main competitors? How sustainable are your technologies? Which investment requirements do you have? 5 Management team and organization Investors increasingly focus on the quality of the management team: its technical and industry specific qualifications, its entrepreneurial experience, its integrity, as well as the commitment and skills of each individual manager. What is more important than the organization chart is the presentation of the key personnel and their skills and expertise. The assessment of the management and their ability to manage a variety of different market and company situations plays a particularly important role. In this context everything depends on the management’s experience in leadership and in dealing with crises, as well as their knowledge of the industry. The description of the management and the organization might be very subjective. Therefore, you should pay particular attention to the topic. In this chapter we would like to deal with the main aspects of company organization and management. Having already taken a critical look at the strategic goals of your company, we can now consider the following questions: How can you achieve your goals, and what resources do you need to achieve these objectives? You can only answer these questions, if you have a definite and plausible idea of the different tasks your company faces and if you make it perfectly clear to yourself how you plan to structure your company, bearing in mind the various workflows, activities and resources. Thus we will first consider the so-called operational structure of your company and then determine its organizational structure. Finally we will turn to the topic of how to organize and structure your management team. 5.1 Operational structure Based on the description of your business idea, your business model and your strategic goals, you can present your operational structure. This will 42 5 Management team and organization require an overriding and not too detailed description of the main workflows along your value chain. This leads us to the way in which you plan to: construct your products and service channels include the products and services of third parties market your products, and manage the cross-functional organization of workflows. By means of these issues you can establish the most significant operational activities of your enterprise and start planning the required resources, people, work material and systems. In doing this, it is important to ensure an overall insight into the market, your target customers. Furthermore, you should have an idea about which products and services you wish to market to which customers. You should also determine production facilities and services as well as precursor materials required. These steps will serve as a guideline for organizing your company. In many cases investors have only limited understanding of the organizational interrelations and tend to judge the financial situation of your company mainly with regard to the balance sheets. Yet it is precisely your company’s organizational presentation which the investors can derive from how efficiently and effectively your company really works. This applies to start-ups and their founders likewise, for it is through the presentation of the operational structure that you can show how explicitly you have considered the internal workflows. In a next step you can plan the resources effectively, which in turn makes the planning and the related expenditures appear plausible and convincing to a third party. Yet how does one assess the operational structure of an enterprise? The operational structure covers the organization of the entire operational processes in a company. It can be defined as sequences of logically related activities or operational steps which are performed within a certain period of time. Thereby, information or materials (e.g. raw materials, forms, phone calls) are applied to a certain work force unit as Input and, in order to achieve added value, are transformed into Output through consecutive activities. Begin with a rough structure of your value chain from the customer’s point of view (important!) and structure the workflows from the acquisition via incoming orders to the purchase of your raw or precursor materials: 5.1 Operational structure 43 Business planning and controlling (Management processes) Strategy formulation Business planning Controlling Measures Core Processes Material provision Supplier Purchase Production planning Production Logistics Order processing Customer / Business associate Marketing/Sales Support processes Finances IT-Support Personal Fig. 5.1. Example of a high level process model. For this purpose you should develop a so-called High Level Process Model, also referred to as process map, in which you additionally describe your customers, suppliers and cooperation partners. The process map can help you to present a structured overview of your operational processes. Usually one distinguishes between three different process groups: Management processes, core processes and support processes. These three types should be analysed and presented in a clear and concise way. Certainly, every company operates in a different way and we can address only general aspects and show common principles. In your own business plan, of course, you should follow the operational structures and processes of your own company from a helicopter perspective. Do avoid elaborating a complete organizational manual, hundreds of pages illustrated with complex process diagrams, and all sub-processes, workflows and activities! In many companies we observe again and again that the operational processes are still not well understood and documented, and the organizational representation is only carried out by means of an organization chart. Of course, that does not suffice to convince an experienced reader of the company’s organizational capabilities. 44 5 Management team and organization The management processes describe the development of a strategy, the business planning and budgeting as well as controlling; they serve the overall planning, steering and control of all the activities in your company. Herein the primary operative duties and responsibilities of the management are anchored. The bigger a company is, the more refined and complex the management duties and responsibilities become. Bundle your duties and responsibilities and define your essential management processes. Remember that it is exactly behind these processes that your overhead costs will be hidden, costs which will immediately influence all your business calculations. The core processes, also called primary processes, are directly involved in the production and marketing of your products and therefore contribute to value creation. It is recommended to structure your entire business process from acquisition through production to purchase and assess at each stage whether the process is still promising. Leading technical changes, for example the introduction of new machines, restructuring of the business processes, or the structuring of customer activities, may result in quite new processes and operational structures, which would influence the efficiency of your organization significantly. During the assessment of the core processes new ideas and starting points often arise in order to introduce changes and improvements. Only if you pay particular attention to your operational processes or your value chain, will you be able to improve and optimize the processes within your company towards a competitive edge. This might be your core competences, competences which you will continuously have to improve and adapt to market challenges. The support processes or so called infrastructural processes include information management, personnel, accounting and finance. Although these processes are not directly linked to the value chain, they basically support the core processes and facilitate the overall operational performance of your company. These processes, too, should be frequently assessed, since they also contribute to overhead costs. The question that could here be posed is whether or not support processes can be outsourced. For small and medium-sized enterprises (SMEs), for instance, it could be advantageous to outsource services like financial and payroll accounting to tax accountants or common service providers. Furthermore, the information management should be appropriately assessed as to whether or not it can partly or entirely be outsourced. Founders should seriously consider outsourcing these types of services from the very beginning in order to concentrate on their core business activities. 5.1 Operational structure Start Invite offers Place an order Compare offers Receive goods 45 Choose potential supplier Transfer of goods to production Production Fig. 5.2. Example of a procurement process. Behind your comprehensive presentation of the processes, there exist, of course, further detailed sub-processes, which become apparent at a further level. Develop and describe these critical sub-processes in their workflows and activities. This will help you to efficiently assess and analyse opportunities for further improvement and optimization. In fig. 5.2 a simplified procurement process with related sub-processes is shown. Following fig 5.2 in particular you could break down the existing activity blocks into further building blocks and conclude the required resources, people and materials. This approach will help you to gain an idea of how to bundle tasks and activities around each of the building blocks, in order to derive precise job descriptions. The above considerations emphasize how important it is to investigate the business processes in order to ensure an efficiently performing operational management. It will quickly become clear to an investor that you run your company professionally. Moreover, if you were able to briefly present to him the most important business processes of your company and to convince him of a contemporary business, you would increase his willingness to invest into your company. Your process map serves as basis for structuring your company. You can assess the main features of your organizational structure and shape them according to your business requirements. 46 5 Management team and organization 5.2 Organizational structure Based on the processes management processes, core processes and support processes described in the last section, you can now generate the organizational structure and units. In order to simplify matters we have considered a company with only one product and have avoided further differentiations and segmentations. We will later point out the various organizational structures. In accordance with the job descriptions, the tasks, the activities and the responsibilities are assigned to the different organizational units. Depending on the volume and complexity of the different tasks, they will be assigned to one or more organizational units. Figure 5.3 shows the organizational structure according to the operational structure in chapter 5.1. This approach is called a process-oriented organizational structure. In this particular example we have assigned each individual process to a specific Geschäftsführung Management Business planning & supervision Core Kernprozesse processes Planung Planning Purchase Einkauf Supervision Steuerung Produktion Production Controlling Logistik Logistics Support processes Accounting & Finanz-- und Financial Mgt. Rechnungswesen Human Personal Ressources IT-Unterstützung IT Services Order Auftragsprocessing Abwicklung Marketing & Sales Fig. 5.3. A process-oriented organizational structure. 5.2 Organizational structure 47 department within the three organizational units. The organizational units concentrate on the management board, where reporting paths converge. You can summarise your organizational structure in an overall organization chart, where you will describe your different organizational units. The design of the organizational structure allows you to focus on: either the essential processes – such as management, core and support processes – or the essential operational functions – such as procurement, development, production, marketing, administration – or the product lines respectively the customer target groups. If you focus on the operational functions, a functional organization will be the result (fig. 5.4). If you focus on the product lines or customer target groups, a business unit or divisional organization will be the result (fig. 5.5). In a functional organization (fig. 5.4) different products can be found in different functional areas, without there being a defined product management unit. The responsibilities are assigned from a functional point of view. In a divisional organization (fig. 5.5), however, the production, marketing, development and so forth are found in separate business units. The choice of organizational form depends mainly on your product portfolio and the required sales channels and customer groups. Management Kernprozesse Marketing & sales Development & applications Regional Einkauf sales manager Application Planung technology Produktion Sales personell Steuerung Laboratory Logistik Sales processing Production Kernprozesse & operation Operation‘ Einkaufs Department Produktion Production Logistik Technology Administration & finances Finanz-- und Accountancy Rechnungswesen Personal Haulage Materials IT-Unterstützung management Human Personal ressources AuftragsProcurement Abwicklung IT IT-Unterstützung Department Fig. 5.4. Example of a functional organization. 48 5 Management team and organization Management Staff position Division A Division B Division C Central departments Finanz- und Sales Rechnungswesen Finanz- und Sales Rechnungswesen Finanz- und Sales Rechnungswesen Finanz-- und Accountancy Rechnungswesen Product Personal management Product Personal management Product Personal management Order IT-Unterstützung processing Order IT-Unterstützung processing Order IT-Unterstützung processing Materials IT-Unterstützung management Personal Production Personal Production Personal Production Human Personal ressources IT-Unterstützung Technology IT-Unterstützung Technology IT-Unterstützung Technology IT IT-Unterstützung Department Personal Controlling Fig. 5.5. Example of a divisional organization. With a narrow homogeneous product programme for a homogeneous customer group, a functional organization is an excellent choice. Whether marketing is an own functional unit or part of the sales department or just a staff position, and whether controlling is a part of the administration or a staff position is of secondary importance and will depend on the competences and skills of your employees. When a broad heterogeneous product program or a variety of customer groups exists, a divisional organization is preferable and promises greater market and customer proximity. However, for such an organizational form you should take into account that numerous fillings of similar functions, higher time consumption and resources for coordination usually result in higher personnel and infrastructure costs. In many companies hybrid organizational forms have proved worthwhile, as you can derive from figure 5.6. A company for instance might be designed as a divisional organization with separate distribution units, back offices, development and application technique groups, while sales, production, logistics and administration remain centrally organized. In this case the organizational linkage to the development department is to be considered very carefully because decentralization may result in parallel developments, if project and development plans are not appropriately synchronised. On the other hand, a central development department may have the disadvantage that priority will be given to the development of certain product lines or assortments and thus 5.2 Organizational structure 49 Management Quality Management Kernprozesse Business Einkauf segment 1 agriculture Business Einkauf segment 1 agriculture Administration Einkauf & finances Business Einkauf segment 2 PP / BOPP Business Einkauf segment 2 PP / BOPP Accountancy Einkauf Business Einkauf segment 3 PE packaging Business Einkauf segment 3 PE packaging Human Einkauf Ressources Business Einkauf segment 4 Paint Business Einkauf segment 4 Paint IT Einkauf Department SalesEinkauf force / Regional Sales SalesEinkauf force / Regional Sales Fig. 5.6. Example of a hybrid organizational type. will provide insufficient capacities for new business opportunities and the assortment of small target groups. In a hybrid type of organization a careful coordination of the sales activities and customer accounts is necessary in order to prevent the concentration of different marketing units with different products on the same customer in order to make the buyer a competing offer. Adapting organization is a crucial topic, particularly in high-growth companies, because these companies can often not fulfil existing requirements by means of the traditional type of organization. Increasing demand and product diversity as well as an expansion of the product assortment require an adaptation of the organizational processes and a restructuring of the functional areas for such companies. You should appropriately describe these modifications of your organizational structure in your business plan. The organization structured according to fig 5.7 is run by two managers. It is a functionally oriented organization with a staff position for controlling which reports directly to the management. The areas of responsibility have been clearly structured and each has been filled by a defined person. 50 5 Management team and organization Management Controlling Procurement Production Sales Research and development Accountancy Fig. 5.7. Further example of an organizational structure. 5.3 Personnel planning When the organizational structure has been determined and the different tasks and the functional areas defined, you can start with the personnel planning. Your strategy here should be to differentiate between regular members of staff and freelancers. In order to achieve your business goals, you may either employ new members of staff or release employees. As an entrepreneur you will usually be confronted with a kind of natural fluctuation in the number of employees, taking into account retirements or resignations. For the different functional areas, such as production, marketing and so forth personnel resources should be well-planned and scheduled. Be aware that a scarcity of personnel would affect your business as negatively as a surplus of personnel. Personnel scarcity would cause interruption of service and product delivery. In contrast a surplus of personnel would increase costs and inefficiency. In order to give you an example, we have developed a personnel plan in accordance with the example in figure 5.7. The existing situation serves as a baseline for further planning of resources, dependent on the employees, the required operations and the transaction volumes. Table 5.1 shows an example of personnel planning per functional area on a monthly basis, as well as the development of the number of employees including their payroll and social costs. By means of personnel planning the personnel requirements can be determined, which are presented in job descriptions. The job descriptions of your employees should include the following essential elements: 5.3 Personnel planning 51 Table 5.1. A personnel planning example. Month 1 No. of Employees Management Purchasing Supervisor Dept head 2 … Month 12 Gross salary per Employee* Personnel cost … No of Employees 13,0 26 … 2 13 Gross salary per Employee* 14,3 Personnel cost Total 29 328 61 650 47 … 16 1 7,0 7 … 1 7,4 7 86 2 5,0 10 … 4 5,1 20 182 Clerks 10 3,0 30 … 11 3,1 34 382 Produktion 21 73 862 71 … 22 Supervisor 1 6,0 6 … 1 6,4 6 74 Technical 4 5,0 20 … 3 5,1 15 212 16 2,5 40 … 18 2,6 46 515 2 2,5 5 2 2,6 5 61 231 2.419 Clerks Administration Sales 172 … 48 Supervisor 2 8,0 16 … 2 8,6 17 199 Field sales 20 5,5 110 … 25 5,9 147 1.543 6 3,5 21 10 3,7 37 351 10 2,5 25 11 2,7 29 327 39 417 Sales support Call-Center clerks 38 R&D 5 31 … 6 Supervisor 1 10,0 10 … 1 11,0 11 Technical 126 3 6,0 18 … 4 6,1 24 255 Assistant 1 3,0 3 … 1 3,1 3 36 Accounting 2 11 … 2 12 135 Supervisor 1 7,5 8 … 1 8,0 8 93 Accountant 1 3,5 4 … 1 3,6 4 43 Controlling 3 15 … 3 16 190 Supervisor 1 9,0 9 … 1 9,7 10 112 Controller 2 3,2 6 … 2 3,3 7 78 373 … 99 460 5.001 Total 84 Name of job, Rank and name of the job holder, Aim of the job, Goals of the job holder, Tasks of the job holder, Demands on the job holder, Area of responsibility of the job holder and Its relationship to other jobs. The job descriptions within your company should have a uniform structure. Since job descriptions frequently change, you should ensure that both their structure and content are continuously adapted and maintained. 52 5.4 5 Management team and organization Management team As previously mentioned, your investors will expect description of your management team. You must explain which people will be responsible for the management of your company and what experience they have had in comparable positions in the past. Their educational and professional background will help to profile your management team. Take into account that in the business world the most convincing criteria are real market success and customer satisfaction, both will ascertain sustainable revenue. However, technological knowledge and understanding can also be of significance if, for instance, you are active in a manufacturing area. Here, too, both the educational and professional background are significant. Furthermore, you should put emphasis on the business and financial skills of your management team: profound knowledge and professional experience in financial accounting, cost management, financing and controlling is essential. However, market success, technological knowledge and business skills are only a minimum of criteria which should be fulfilled by your management team. In addition to this you should introduce the very individual and personal profile of your managers: their name, marital status, age, education, special merits and experiences etc. Keep in mind that the quality of your management team is the most critical success factor of your company. Unfortunately, in practise, technological expertise often is well-profiled, yet a profound market expertise is missing. Hence, the professional reader will presume long term revenue and return on investment to be vulnerable. Check your management team to be sure whether you have established a balance between market, technology and finance orientation. This not only applies to start-ups but also to well-established companies. Established companies should particularly check the follow-up regulations in their corporate management. A management team member’s sudden exit can raise a considerable risk and endanger the survival of your company. You should clearly point out in your business plan how you intend to deal with this topic and whether you can already provide a solution. 5.5 Reporting systems After having thus described your management team, you should attend to a description of your reporting system. In order to achieve highest transparency of your operational structure and the business processes within your 5.5 Reporting systems 53 organization as well as their related costs, you will be in the need of a qualified reporting system. Such a system would facilitate the overall transparency and managerial control over costs. A reporting system, however, not only provides an annual planning of your business and the resulting financial statements, but also a set of additional instruments: The structuring of the company towards cost centres, the planning of the related costs, the monthly recording of the accumulated costs per cost centre and the monthly accounting for cost transgressions by those responsible for the cost centres. A product or cost unit calculation with at least a six-monthly comparison between pre-calculation and post-calculation. A customer unit calculation at least with respect to corresponding profit margins and including the real marketing and sales costs. A monthl

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