The competitive analysis is a statement of the business strategy and how
it relates to the competition. The purpose of the competitive analysis
is to determine the strengths and weaknesses of the competitors within
your market, strategies that will provide you with a distinct advantage,
the barriers that can be developed in order to prevent competition from
entering your market, and any weaknesses that can be exploited within
the product development cycle.
The first step in a competitor analysis is to identify the current
and potential competition. There are essentially two ways you can
identify competitors. The first is to look at the market from the
customer's viewpoint and group all your competitors by the degree to
which they contend for the buyer's dollar. The second method is to group
competitors according to their various competitive strategies so you
understand what motivates them.
Once you've grouped your competitors, you can start to
analyze their strategies and identify the areas where they're most
vulnerable. This can be done through an examination of your competitors'
weaknesses and strengths. A competitor's strengths and weaknesses are
usually based on the presence and absence of key assets and skills
needed to compete in the market.
To determine just what constitutes a key asset or skill within an industry, David A. Aaker in his book,
According to theory, the performance of a company within a market is
directly related to the possession of key assets and skills. Therefore,
an analysis of strong performers should reveal the causes behind such a
successful track record. This analysis, in conjunction with an
examination of unsuccessful companies and the reasons behind their
failure, should provide a good idea of just what key assets and skills
are needed to be successful within a given industry and market segment.
Through your competitor analysis, you will also have to create a
marketing strategy that will generate an asset or skill competitors
don't have, which will provide you with a distinct and enduring
competitive advantage. Since competitive advantages are developed from
key assets and skills, you should sit down and put together a
competitive strength grid. This is a scale that lists all your major
competitors or strategic groups based upon their applicable assets and
skills and how your own company fits on this scale.
To put together a competitive strength grid, list all the key assets and
skills down the left margin of a piece of paper. Along the top, write
down two column headers: "weakness" and "strength." In each asset or
skill category, place all the competitors that have weaknesses in that
particular category under the weakness column, and all those that have
strengths in that specific category in the strength column. After you've
finished, you'll be able to determine just where you stand in relation
to the other firms competing in your industry.
Once you've established the key assets and skills necessary to
succeed in this business and have defined your distinct competitive
advantage, you need to communicate them in a strategic form that will
attract market share as well as defend it. Competitive strategies
usually fall into these five areas:
Many of the factors leading to the formation of a strategy should
already have been highlighted in previous sections, specifically in
marketing strategies. Strategies primarily revolve around establishing
the point of entry in the product life cycle and an endurable
competitive advantage. As we've already discussed, this involves
defining the elements that will set your product or service apart from
your competitors or strategic groups. You need to establish this
competitive advantage clearly so the reader understands not only how you
will accomplish your goals, but also why your strategy will work.
What You'll Cover in This Section
The purpose of the design and development plan section
is to provide investors with a description of the product's design,
chart its development within the context of production, marketing and
the company itself, and create a development budget that will enable the
company to reach its goals.
There are generally three areas you'll cover in the development plan section.
-
Product Development
- Development Budget
-Organizational development
Each of these elements needs to be examined from the funding
of the plan to the point where the business begins to experience a
continuous income. Although these elements will differ in nature
concerning their content, each will be based on structure and goals.
The first step in the development process is setting goals for the
overall development plan. From your analysis of the market and
competition, most of the product, market and organizational development
goals will be readily apparent. Each goal you define should have certain
characteristics. Your goals should be quantifiable in order to set up
time lines, directed so they relate to the success of the business,
consequential so they have impact upon the company, and feasible so that
they aren't beyond the bounds of actual completion.
Goals For Product Development
Goals for product development should center on the
technical as well as the
marketing
aspects of the product so that you have a focused outline from which
the development team can work. For example, a goal for product
development of a microbrewed beer might be "Produce recipe for premium
lager beer" or "Create packaging for premium lager beer." In terms of
market development, a goal might be, "Develop collateral marketing
material." Organizational goals would center on the acquisition of
expertise in order to attain your product and market-development goals.
This expertise usually needs to be present in areas of key assets that
provide a competitive advantage. Without the necessary expertise, the
chances of bringing a product successfully to market diminish.
Procedures
With your goals set and expertise in place, you need to form a set of
procedural tasks or work assignments for each area of the development
plan. Procedures will have to be developed for product development,
market development, and organization development. In some cases, product
and organization can be combined if the list of procedures is short
enough.
Procedures should include how resources will be allocated, who is in
charge of accomplishing each goal, and how everything will interact. For
example, to produce a recipe for a premium lager beer, you would need
to do the following:
- Gather ingredients.
- Determine optimum malting process.
- Gauge mashing temperature.
- Boil wort and evaluate which hops provide the best flavor.
- Determine yeast amounts and fermentation period.
- Determine aging period.
- Carbonate the beer.
- Decide whether or not to pasteurize the beer.
The development of procedures provides a list of work assignments
that need to be accomplished, but one thing it doesn't provide are the
stages of development that coordinate the work assignments within the
overall development plan. To do this, you first need to amend the work
assignments created in the procedures section so that all the individual
work elements are accounted for in the development plan. The next stage
involves setting deliverable dates for components as well as the
finished product for testing purposes. There are primarily three steps
you need to go through before the product is ready for final delivery:
- Preliminary product review. All the product's features and specifications are checked.
- Critical product review. All the key elements of the product
are checked and gauged against the development schedule to make sure
everything is going according to plan.
- Final product review. All elements of the product are checked against goals to assure the integrity of the prototype.
Scheduling and Costs
This is one of the most important elements in the development plan.
Scheduling includes all of the key work elements as well as the stages
the product must pass through before customer delivery. It should also
be tied to the development budget so that expenses can be tracked. But
its main purpose is to establish time frames for completion of all work
assignments and juxtapose them within the stages through which the
product must pass. When producing the schedule, provide a column for
each procedural task, how long it takes, start date and stop date. If
you want to provide a number for each task, include a column in the
schedule for the task number.
Development Budget
That leads us into a discussion of the development budget. When forming
your development budget, you need to take into account all the expenses
required to design the product and to take it from prototype to
production.
Costs that should be included in the development budget include:
- Material. All raw materials used in the development of the product.
- Direct labor. All labor costs associated with the development of the product.
- Overhead. All overhead expenses required to operate the
business during the development phase such as taxes, rent, phone,
utilities, office supplies, etc.
- G&A costs. The salaries of executive and administrative personnel along with any other office support functions.
- Marketing & sales. The salaries of marketing personnel
required to develop pre-promotional materials and plan the marketing
campaign that should begin prior to delivery of the product.
- Professional services. Those costs associated with the consultation of outside experts such as accountants, lawyers, and business consultants.
- Miscellaneous Costs. Costs that are related to product development.
- Capital equipment. To determine the capital requirements for
the development budget, you first have to establish what type of
equipment you will need, whether you will acquire the equipment or use
outside contractors, and finally, if you decide to acquire the
equipment, whether you will lease or purchase it.
Personnel
As we mentioned already, the company has to have the proper expertise in
key areas to succeed; however, not every company will start a business
with the expertise required in every key area. Therefore, the proper
personnel have to be recruited, integrated into the development process,
and managed so that everyone forms a team focused on the achievement of
the development goals.
Before you begin recruiting, however, you should determine which
areas within the development process will require the addition of
personnel. This can be done by reviewing the goals of your development
plan to establish key areas that need attention. After you have an idea
of the positions that need to be filled, you should produce a job
description and job specification.
Once you've hired the proper personnel, you need to integrate them
into the development process by assigning tasks from the work
assignments you've developed. Finally, the whole team needs to know what
their role is within the company and how each interrelates with every
position within the development team. In order to do this, you should
develop an organizational chart for your development team.
Assessing Risks
Finally, the risks involved in developing the product should be assessed
and a plan developed to address each one. The risks during the
development stage will usually center on technical development of the
product, marketing, personnel requirements, and financial problems. By
identifying and addressing each of the perceived risks during the
development period, you will allay some of your major fears concerning
the project and those of investors as well.
Operations & Management
The operations and management plan is designed to describe just how
the business functions on a continuing basis. The operations plan will
highlight the logistics of the organization such as the various
responsibilities of the management team, the tasks assigned to each
division within the company, and capital and expense requirements
related to the operations of the business. In fact, within the
operations plan you'll develop the next set of financial tables that
will supply the foundation for the "Financial Components" section.
The financial tables that you'll develop within the operations plan include:
- The operating expense table
- The capital requirements table
- The cost of goods table
There are two areas that need to be accounted for when
planning the operations of your company. The first area is the
organizational structure of the company, and the second is the expense
and capital requirements associated with its operation.
Organizational Structure
The organizational structure of the company is an essential element
within a business plan because it provides a basis from which to project
operating expenses. This is critical to the formation of financial
statements, which are heavily scrutinized by investors; therefore, the
organizational structure has to be well-defined and based within a
realistic framework given the parameters of the business.
Although every company will differ in its organizational structure, most can be divided into several broad areas that include:
- Marketing and sales (includes customer relations and service)
- Production (including quality assurance)
- Research and development
- Administration
These are very broad classifications and it's important to keep in
mind that not every business can be divided in this manner. In fact,
every business is different, and each one must be structured according
to its own requirements and goals.
The four stages for organizing a business are:
1. Establish a list of the tasks using the broadest of classifications possible.
2. Organize these tasks into departments that produce an efficient line of communications between staff and management.
3. Determine the type of personnel required to perform each task.
4. Establish the function of each task and how it will relate to the generation of revenue within the company.
Calculate Your Personnel Numbers
Once you've structured your business, however, you need to consider your
overall goals and the number of personnel required to reach those
goals. In order to determine the number of employees you'll need to meet
the goals you've set for your business, you'll need to apply the
following equation to each department listed in your organizational
structure:
C / S = P
In this equation, C represents the total number of customers, S
represents the total number of customers that can be served by each
employee, and P represents the personnel requirements. For instance, if
the number of customers for first year sales is projected at 10,110 and
one marketing employee is required for every 200 customers, you would
need 51 employees within the marketing department:
10,110 / 200 = 51
Once you calculate the number of employees that you'll need for your
organization, you'll need to determine the labor expense. The factors
that need to be considered when calculating labor expense (LE) are the
personnel requirements (P) for each department multiplied by the
employee salary level (SL). Therefore, the equation would be:
P * SL = LE
Using the marketing example from above, the labor expense for that department would be:
51 * $40,000 = $2,040,000
Calculate Overhead Expenses
Once the organization's operations have been planned, the expenses
associated with the operation of the business can be developed. These
are usually referred to as overhead expenses. Overhead expenses refer to
all non-labor expenses required to operate the business. Expenses can
be divided into
fixed (those that must be paid, usually at the same rate, regardless of the volume of business) and
variable or
semivariable (those which change according to the amount of business).
Overhead expenses usually include the following:
- Travel
- Maintenance and repair
- Equipment leases
- Rent
- Advertising & promotion
- Supplies
- Utilities
- Packaging & shipping
- Payroll taxes and benefits
- Uncollectible receivables
- Professional services
- Insurance
- Loan payments
- Depreciation
In order to develop the overhead expenses for the expense table used
in this portion of the business plan, you need to multiply the number of
employees by the expenses associated with each employee. Therefore, if
NE represents the number of employees and EE is the expense per
employee, the following equation can be used to calculate the sum of
each overhead (OH) expense:
OH = NE * EE
Develop a Capital Requirements Table
In addition to the expense table, you'll also need to develop a capital
requirements table that depicts the amount of money necessary to
purchase the equipment you'll use to establish and continue operations.
It also illustrates the amount of depreciation your company will incur
based on all equipment elements purchased with a lifetime of more than
one year.
In order to generate the capital requirements table, you first have
to establish the various elements within the business that will require
capital investment. For service businesses, capital is usually tied to
the various pieces of equipment used to service customers.
Capital for manufacturing companies, on the other hand, is based on
the equipment required in order to produce the product. Manufacturing
equipment usually falls into three categories: testing equipment,
assembly equipment and packaging equipment.
With these capital elements in mind, you need to determine the number
of units or customers, in terms of sales, that each equipment item can
adequately handle. This is important because capital requirements are a
product of income, which is produced through unit sales. In order to
meet sales projections, a business usually has to invest money to
increase production or supply better service. In the business plan,
capital requirements are tied to projected sales as illustrated in the
revenue model shown earlier in this chapter.
For instance, if the capital equipment required is capable of
handling the needs of 10,000 customers at an average sale of $10 each,
that would be $100,000 in sales, at which point additional capital will
be required in order to purchase more equipment should the company grow
beyond this point. This leads us to another factor within the capital
requirements equation, and that is equipment cost.
If you multiply the cost of equipment by the number of customers it
can support in terms of sales, it would result in the capital
requirements for that particular equipment element. Therefore, you can
use an equation in which capital requirements (CR) equals sales (S)
divided by number of customers (NC) supported by each equipment element,
multiplied by the average sale (AS), which is then multiplied by the
capital cost (CC) of the equipment element. Given these parameters, your
equation would look like the following:
CR = [(S / NC) * AS] * CC
The capital requirements table is formed by adding all your equipment
elements to generate the total new capital for that year. During the
first year, total new capital is also the total capital required. For
each successive year thereafter, total capital (TC) required is the sum
of total new capital (NC) plus total capital (PC) from the previous
year, less depreciation (D), once again, from the previous year.
Therefore, your equation to arrive at total capital for each year
portrayed in the capital requirements model would be:
TC = NC + PC - D
Keep in mind that depreciation is an expense that shows the decrease
in value of the equipment throughout its effective lifetime. For many
businesses, depreciation is based upon schedules that are tied to the
lifetime of the equipment. Be careful when choosing the schedule that
best fits your business. Depreciation is also the basis for a tax
deduction as well as the flow of money for new capital. You may need to
seek consultation from an expert in this area.
Create a Cost of Goods Table
The last table that needs to be generated in the operations and
management section of your business plan is the cost of goods table.
This table is used only for businesses where the product is placed into
inventory. For a retail or wholesale business,
cost of goods sold--or
cost of sales--refers
to the purchase of products for resale, i.e. the inventory. The
products that are sold are logged into cost of goods as an expense of
the sale, while those that aren't sold remain in inventory.
For a manufacturing firm, cost of goods is the cost incurred by the
company to manufacture its product. This usually consists of three
elements:
1. Material
2. Labor
3. Overhead
As in retail, the merchandise that is sold is expensed as a
cost of goods,
while merchandise that isn't sold is placed in inventory. Cost of goods
has to be accounted for in the operations of a business. It is an
important yardstick for measuring the firm's profitability for the
cash-flow statement and income statement.
In the income statement, the last stage of the manufacturing process
is the item expensed as cost of goods, but it is important to document
the inventory still in various stages of the manufacturing process
because it represents assets to the company. This is important to
determining cash flow and to generating the balance sheet.
That is what the cost of goods table does. It's one of the most
complicated tables you'll have to develop for your business plan, but
it's an integral part of portraying the flow of inventory through your
operations, the placement of assets within the company, and the rate at
which your inventory turns.
In order to generate the cost of goods table, you need a little more
information in addition to what your labor and material cost is per
unit. You also need to know the total number of units sold for the year,
the percentage of units which will be fully assembled, the percentage
which will be partially assembled, and the percentage which will be in
unassembled inventory. Much of these figures will depend on the capacity
of your equipment as well as on the inventory control system you
develop. Along with these factors, you also need to know at what stage
the majority of the labor is performed.
Financial Components
Financial Statements to Include
Financial data is always at the back of the business plan, but that
doesn't mean it's any less important than up-front material such as the
business concept and the management team. Astute investors look
carefully at the charts, tables, formulas and spreadsheets in the
financial section, because they know that this information is like the
pulse, respiration rate and blood pressure in a human--it shows whether
the patient is alive and what the odds are for continued survival.
Financial statements, like bad news, come in threes. The news in
financial statements isn't always bad, of course, but taken together it
provides an accurate picture of a company's current value, plus its
ability to pay its bills today and earn a profit going forward.
The three common statements are a cash flow statement, an
income statement and a balance sheet. Most entrepreneurs should provide
them and leave it at that. But not all do. But this is a case of the
more, the less merry. As a rule, stick with the big three: income,
balance sheet and cash flow statements.
These three statements are interlinked, with changes in one
necessarily altering the others, but they measure quite different
aspects of a company's financial health. It's hard to say that one of
these is more important than another. But of the three, the income
statement may be the best place to start.
Income Statement
The income statement is a simple and straightforward report on the
proposed business's cash-generating ability. It's a score card on the
financial performance of your business that reflects when sales are made
and when expenses are incurred. It draws information from the various
financial models developed earlier such as revenue, expenses, capital
(in the form of depreciation), and cost of goods. By combining these
elements, the income statement illustrates just how much your company
makes or loses during the year by subtracting cost of goods and expenses
from revenue to arrive at a net result--which is either a profit or a
loss.
For a business plan, the income statement should be generated on a
monthly basis during the first year, quarterly for the second, and
annually for each year thereafter. It's formed by listing your financial
projections in the following manner:
- Income. Includes all the income generated by the business and its sources.
- Cost of goods. Includes all the costs related to the sale of products in inventory.
- Gross profit margin. The difference between revenue and cost
of goods. Gross profit margin can be expressed in dollars, as a
percentage, or both. As a percentage, the GP margin is always stated as a
percentage of revenue.
- Operating expenses. Includes all overhead and labor expenses associated with the operations of the business.
- Total expenses. The sum of all overhead and labor expenses required to operate the business.
- Net profit. The difference between gross profit margin and
total expenses, the net income depicts the business's debt and capital
capabilities.
- Depreciation. Reflects the decrease in value of capital
assets used to generate income. Also used as the basis for a tax
deduction and an indicator of the flow of money into new capital.
- Net profit before interest. The difference between net profit and depreciation.
- Interest. Includes all interest derived from debts, both
short-term and long-term. Interest is determined by the amount of
investment within the company.
- Net profit before taxes. The difference between net profit before interest and interest.
- Taxes. Includes all taxes on the business.
- Profit after taxes. The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.
Following the income statement is a short note analyzing the
statement. The analysis statement should be very short, emphasizing key
points within the income statement.
Cash Flow Statement
The cash-flow statement is one of the most critical information tools
for your business, showing how much cash will be needed to meet
obligations, when it is going to be required, and from where it will
come. It shows a schedule of the money coming into the business and
expenses that need to be paid. The result is the profit or loss at the
end of the month or year. In a cash-flow statement, both profits and
losses are carried over to the next column to show the cumulative
amount. Keep in mind that if you run a loss on your cash-flow statement,
it is a strong indicator that you will need additional cash in order to
meet expenses.
Like the income statement, the cash-flow statement takes advantage of
previous financial tables developed during the course of the business
plan. The cash-flow statement begins with cash on hand and the revenue
sources. The next item it lists is expenses, including those accumulated
during the manufacture of a product. The capital requirements are then
logged as a negative after expenses. The cash-flow statement ends with
the net cash flow.
The cash-flow statement should be prepared on a monthly basis during
the first year, on a quarterly basis during the second year, and on an
annual basis thereafter. Items that you'll need to include in the
cash-flow statement and the order in which they should appear are as
follows:
- Cash sales. Income derived from sales paid for by cash.
- Receivables. Income derived from the collection of receivables.
- Other income. Income derived from investments, interest on loans that have been extended, and the liquidation of any assets.
- Total income. The sum of total cash, cash sales, receivables, and other income.
- Material/merchandise. The raw material used in the
manufacture of a product (for manufacturing operations only), the cash
outlay for merchandise inventory (for merchandisers such as wholesalers
and retailers), or the supplies used in the performance of a service.
- Production labor. The labor required to manufacture a product (for manufacturing operations only) or to perform a service.
- Overhead. All fixed and variable expenses required for the production of the product and the operations of the business.
- Marketing/sales. All salaries, commissions, and other direct costs associated with the marketing and sales departments.
- R&D. All the labor expenses required to support the research and development operations of the business.
- G&A. All the labor expenses required to support the administrative functions of the business.
- Taxes. All taxes, except payroll, paid to the appropriate government institutions.
- Capital. The capital required to obtain any equipment elements that are needed for the generation of income.
- Loan payment. The total of all payments made to reduce any long-term debts.
- Total expenses. The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital and loan payments.
- Cash flow. The difference between total income and total expenses. This amount is carried over to the next period as beginning cash.
- Cumulative cash flow. The difference between current cash flow and cash flow from the previous period.
As with the income statement, you will need to analyze the cash-flow
statement in a short summary in the business plan. Once again, the
analysis statement doesn't have to be long and should cover only key
points derived from the cash-flow statement.
The Balance Sheet
The last financial statement you'll need to develop is the balance
sheet. Like the income and cash-flow statements, the balance sheet uses
information from all of the financial models developed in earlier
sections of the business plan; however, unlike the previous statements,
the balance sheet is generated solely on an annual basis for the
business plan and is, more or less, a summary of all the preceding
financial information broken down into three areas:
1. Assets
2. Liabilities
3. Equity
To obtain financing for a new business, you may need to provide a
projection of the balance sheet over the period of time the business
plan covers. More importantly, you'll need to include a personal
financial statement or balance sheet instead of one that describes the
business. A personal balance sheet is generated in the same manner as
one for a business.
As mentioned, the balance sheet is divided into three sections. The
top portion of the balance sheet lists your company's assets. Assets are
classified as current assets and long-term or fixed assets. Current
assets are assets that will be converted to cash or will be used by the
business in a year or less. Current assets include:
- Cash. The cash on hand at the time books are closed at the end of the fiscal year.
- Accounts receivable. The income derived from credit accounts.
For the balance sheet, it's the total amount of income to be received
that is logged into the books at the close of the fiscal year.
- Inventory. This is derived from the cost of goods table. It's the inventory of material used to manufacture a product not yet sold.
- Total current assets. The sum of cash, accounts receivable, inventory, and supplies.
Other assets that appear in the balance sheet are called long-term or
fixed assets. They are called long-term because they are durable and
will last more than one year. Examples of this type of asset include:
- Capital and plant. The book value of all capital equipment and property (if you own the land and building), less depreciation.
- Investment. All investments by the company that cannot be
converted to cash in less than one year. For the most part, companies
just starting out have not accumulated long-term investments.
- Miscellaneous assets. All other long-term assets that are not "capital and plant" or "investments."
- Total long-term assets. The sum of capital and plant, investments, and miscellaneous assets.
- Total assets. The sum of total current assets and total long-term assets.
After the assets are listed, you need to account for the liabilities
of your business. Like assets, liabilities are classified as current or
long-term. If the debts are due in one year or less, they are classified
as a current liabilities. If they are due in more than one year, they
are long-term liabilities. Examples of current liabilities are as
follows:
- Accounts payable. All expenses derived from purchasing items from regular creditors on an open account, which are due and payable.
- Accrued liabilities. All expenses incurred by the business
which are required for operation but have not been paid at the time the
books are closed. These expenses are usually the company's overhead and
salaries.
- Taxes. These are taxes that are still due and payable at the time the books are closed.
- Total current liabilities. The sum of accounts payable, accrued liabilities, and taxes.
Long-term liabilities include:
- Bonds payable. The total of all bonds at the end of the year that are due and payable over a period exceeding one year.
- Mortgage payable. Loans taken out for the purchase of real
property that are repaid over a long-term period. The mortgage payable
is that amount still due at the close of books for the year.
- Notes payable. The amount still owed on any long-term debts that will not be repaid during the current fiscal year.
- Total long-term liabilities. The sum of bonds payable, mortgage payable, and notes payable.
- Total liabilities. The sum of total current and long-term liabilities.
Once the liabilities have been listed, the final portion of the
balance sheet-owner's equity-needs to be calculated. The amount
attributed to owner's equity is the difference between total assets and
total liabilities. The amount of equity the owner has in the business is
an important yardstick used by investors when evaluating the company.
Many times it determines the amount of capital they feel they can safely
invest in the business.
In the business plan, you'll need to create an analysis statement for
the balance sheet just as you need to do for the income and cash flow
statements. The analysis of the balance sheet should be kept short and
cover key points about the company.
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