Critical Appraisal of Business Planning Process - Essay Example

 Critical appraisal of business planning process Introduction A successful entrepreneurial venture starts with understanding all of the internally and externally driven forces that will impede or improve market position. A business that is going to be able to adequately service customers, maintain profit expectations, mitigate risk, and ensure alignment between strategy and accounting must conduct extensive planning. The business plan provides the initial template by which the organisation will structure its cost systems, management structure and produce activities that contribute to successful competitive rivalry for improved market share in the industry where the business delivers products or services. This report describes the importance of strategy, market research and analysis, financials, competitive strategy and generating ideas as fundamental outcomes of proper business planning. Idea generation and strategy External market conditions change rapidly in certain industries, thus driving a need for innovation in order to compete with other businesses operating in the same market environment. Products and services both from an entrepreneurial business and the competitive environment have a specific life cycle by which it generates profitability and consumer adoption patterns. A product or service will move from growth to maturity, a period where sales decline and thus new product development becomes a critical internal activity of the organisation. This is why generating new ideas becomes a paramount objective in the planning process, usually requiring the input of executive leadership and managers to determine how best to introduce a new product whilst still recognising costs. In generating new product ideas, the business leadership must determine whether compromises will be made, opportunity costs or trade-offs, in order to launch a new product or service on the market. “Will conventional wisdom be defied, an understanding that teams, plans and reflects on learning lead to reduced cost, risk and speed to market”? (Corp 2008: 1). Recognising the financial impact of new product development and market launch urgency must be considered when generating new ideas. Innovations, however, are critical to maintaining a stable market position. Strategy formulation determines the objectives necessary to achieve a long-term market position. Strategy defines sustainability over the long-run or whether growth is an expectation related to revenue-building. An entrepreneurial dimension of strategy is persisting to find a better fit in the competitive market or developing a vision by which the organisation founds its values and organisational structure against (Majumdar 2008). Developing a long-term orientation is necessary in business planning as it determines the strategic direction the business intends to pursue and thus resources are allocated toward meeting this purpose. Market analysis and competitive strategy Michael Porter identifies five competitive forces that impact business success, including threat of new entrants, the availability of substitute products, supplier and buyer power in the market, and concerns over what types of competitive strategies are being developed by other businesses operating in the same market (Porter 2010). It is necessary to scan the external environment in order to understand what socio-economic and socio-cultural trends are observable in key target markets in order to develop a service or product plan designed to properly fit these attitudes or financial predictors. Market analysis identifies all of the fundamental hindrances or advantages that are linked to strategic intention and competitive strategy, thus the planning process must include market research. Businesses that are heavily reliant on consumer revenues must understand what drives buyer behaviour, and this is best performed through surveys, questionnaires or focus groups. Consumers either favour or disapprove of a particular product or business concept based on how they view its value to fulfilling their consumption or lifestyle needs, thus market analysis determines the internal steps required to build a market orientation for reputation and economic sustainability purposes. In markets where there is heavy saturation of competitive forces that provide similar products or services, it is necessary to understand what elements of the marketing mix are driving their marketing strategies. For instance, analysis of the competitive environment might indicate that competitors are utilising considerable capital resources toward advertising and promotion, but are not achieving the financial results expected by their own strategic plans. This gives the entrepreneurial business the template by which to develop a new strategy that focuses more on value provision, thus being able to reserve financial resources that might have been applied to a large-scale advertising and promotional scheme in an effort to gain consumer attention. Cost factors Managers within the business must determine the best possible methods in order to link accounting function with business operations. The cash flow statement offers a highlight of the balance-of-payments associated with business functioning, related to credits and debits to external suppliers and creditors; as well as customer revenue production. Cash flow analysis ensures that the business is not spending more than it is achieving through customer revenues to determine a break-even or to assist in cost reduction through new supply chain strategy development, as one example. The profit and loss forecast also links accounting function with operations, helping the entrepreneur to understand whether operational cost reduction is required such as the establishment of process controls to improve productivity. These financial documents indicate the economic sustainability of the business that can assist in improving governance processes, quality controls, or reduce financial reliance on promotion. The balance sheet contributes to understanding whether strategic objectives are leading toward profitability, measuring debt versus equity that can lead to better internal organisation or long-term market position. All of the financial documents are part of risk assessment as well, determining overall solvency that assist in developing new pricing structures for products and indicate where divisional weaknesses reside that lead to declining capital resources. According to Peterson (1991, p.27) “risk managers are advised to be on the solvency alert”. Financial risk management is linked directly to these and other financial documents, providing an outline for change management within the business structure in order to improve areas that are contributing to more concentrated economic losses. Related to the business plan, an entrepreneurial leader cannot consider itself a success unless he or she has maximized profitability associated with their products or services. The cash flow, balance sheet, and profit and loss documents are the most effective measure of linking internal operations with capital resource procurement to create a robust entrepreneurial operation. These documents are not only indicators of the current financial state of the business, but are risk mitigation tools associated with operational controls and improvements. Scenario analysis Scenario analysis maintains different meaning based on the type of industry that the entrepreneur has developed. However, in general, it is the process of analysing real-world situations that occur during the process of service provision or product sales so as to determine changes or improvements required in management activity or market position. For instance, an entrepreneur might develop an organisation to target a particular market due to limited competition that gives them a competitive edge. Over time, however, ease of entry (limited barriers) into this market has spontaneously created considerable competitive forces that erode the business’ market share. Scenario analysis looks at how the business is currently organised in the market, viewing consumers as resources, so as to determine how the business should alter its strategic course from a market-oriented to a competitive-oriented firm with more investment in advertising. The scenario analysis is essentially stepping back from the business and looking at it through a critical lens, as an external observer, to witness operational efficiencies and then develop appropriate change methodology. Many factors can be identified in scenario analysis including financial ratios, market research statistics, external B2B relationship factors, or even the technological environment that currently supports business efficiency. Summary There are many external factors that contribute to whether or not the business finds a suitable position in its current market. Most important is knowledge about what is driving consumer attitudes about a particular product or service since the majority of capital procurement stems from product or service sales. Business planning is not something that occurs one-time during the initial launch of the entrepreneurial venture, but must be ongoing management philosophy in order to innovate, recognise cost reductions and controls, and establish new best practice functioning for efficiency, productivity and market sustainability. All of the analyses and financial documentation described in this report are required in business planning in order to link strategy with accounting demands. An entrepreneur has specific profitability goals and without external analyses and financial documentation, he or she has no method of reducing risk or creating a capable and competent internal structure by which to deliver products and services. The financial documents, market research and analysis tools, and development of competitive strategy contribute highly to profit success and achieving total customer satisfaction. Each element contributes differently to the planning process, however all are required in order to create a business that can sustain a positive market position with competitive advantages. Planning is the most important obligation of the management team due to changing market conditions, rising costs in the external market and changing consumer sentiment that occurs regularly. References Corp, S. (2008) [internet] 2008 New product development study: consumers continue to drive innovation [accessed November 13, 0211 at http://www.clearseasreasearch.com/CSR/Home/Files/PDF/NParticle-NewProductsCLEAReport.pdf] Majumdar, S. (2008) Modelling growth strategy in small entrepreneurial business organisations, The Journal of Entrepreneurship 17(2), 157. Petersen, R.C. (1991) Putting risk managers on the solvency alert, Risk Management 38(6), 26-31. Porter, M. (2010) [internet] Porter’s Five Forces – A model for industry analysis [accessed November 13, 2011 at http://www.quickmba.com/strategy/porter.shtml] Read More