Individual Strategic Business Planning - Research Paper Example

Individual Strategic Business Planning portfolio Table of Contents Executive Summary 3 Business Description 3 Marketing 4 Research, Design, and Development 6 Manufacturing/Operations 6 Organization 8 Critical Risks 9 Milestone Schedule 9 Appendix 10 Estimated business income 11 Financial assumptions 12 Summarised financial results 13 Anticipated returns 14 Lapses 15 Reference 18 Bibliography 21 Item 1 Executive Summary The business plan clearly outlines the type of business it plans to establish. The business involves the development and marketing of the commercial applications for the ‘impeller technology’ of an innovative fan. The reason ensuring the success of the business plan has been stated as “growing trend towards miniaturization” which will create demand for small sized and efficient fans. By virtue of the sophisticated technology JetFan Ltd expects to capitalize on the demand for sophistication by the consumers. The amount of money required for the business initiative has been stated as $2.5 million worth equity capital. Moreover by way of ‘intellectual property’ rights the company will be able to avoid any duplication of the impeller technology in the market besides giving it a good brand name. So the Executive Summary portion of the business plan clearly highlights all the aspects relating to fund requirement, project worthiness etc. Overall it can be said that the portion covers all the relevant questions making it an ‘excellent’ one. Business Description The business plan has been stated as ‘commercialization’ of impeller technology in worldwide market by entering into alliances with the leaders in the fan manufacturing market. The product offered by the business has been stated clearly in section “Creating the JetFan Revolution” where it has been stated that the business plans to offer small-sized, quieter and convenient fans to the consumers. This is an expansionary business opportunity. The reasons for the success of the plan has been outlined in the section “Why use JetFan and why now”. Here the benefits of adapting to the new technology have been stated as stall-free, miniaturization, less power consumption, reduced noise etc. The pressure differential advantages of JetFan over the conventional axial flow have been presented by way of a chart. The growth forecast for the JetFan market has been anticipated to be 15 percent every year. The section “Creating the JetFan Revolution” highlights the unique features of the JetFan’s unique impeller design. It has been mentioned how the JetFan scores over traditional plans in terms of higher airflow, improved efficiency, long battery life etc. Besides it has been stated how the JetFan reduces the inventory and tooling costs for the manufacturers. So overall in the business plan the details relating to nature of the business, products offered, its unique benefits, future growth prospects, salient product features and the unique business characteristics have been clearly outlined. So overall a good description of the business has been given. Marketing The market size has been conservatively estimated at 350 million small fans. This has been expected to grow by 15% annually. The market trend has also been anticipated to be strong owing to the fast replacement of the desktop computers with portable computers. The business plans to sell its impellers to the manufacturers in various industries. This implies that the business will not supply to the customers directly rather it will function as an intermediary as the plan clearly states that the sale of the impellers will be mainly to the manufacturers. The plan states that the business faces direct competitions from the manufacturers of specialist fans like Papst, NMB and Sunon. In the event JetFan decides to manufacture complete units of fans then it is expected to face significant direct competition. These fan manufacturers occupy a sizable portion of the market. However, it has also been stated that if the company sticks to the production of fan impellers instead of making a foray in fan manufacturing then it will not face any direct competition. The business plans clearly highlights that the only indirect competition that may arise is from the use of alternative technologies. In other words the business plan has nicely put its indirect competition as “Threat from substitutes”. The business plan highlights that owing to the JetFan embedded technology the fan manufacturers can reap higher profits. A research conducted for the purpose of the business plan reveals that the fan manufacturers would be ready to pay $2 for acquiring the JetFan impellers. The business plan does not mention clearly about the advertising strategy. The promotional strategy that it plans to use has been depicted by the way of a chart. The author has stated that there will be a three pronged promotional strategy- forming of collaboration with the manufacturers of CPU chips, direct promotion of the JetFans benefits to the OEMs and targeting the manufacturers of fans for forming strategic alliances and entering into a long term supply agreements. But the business plan does not state clearly how it plans to achieve these collaborations or how it aims to target the fan manufacturers for the purpose of making the arrangement. Overall the issues under the head ‘Marketing’ give answers to all probable queries relating to product pricing, customers, competition etc. However the plan fails to address the promotional aspect in great details. Research, Design, and Development The business plan gives a clear description about its proposed research and development program. It has been mentioned that it plans to adapt its existing impeller technology for various other product applications. In the business plan it has been clearly stated that it plans to conduct have an in-house R&D facility in order to maintain the secrecy of its technology. The technology that the business plans to use has been tested independently by “the School of Mechanical, Medical and Manufacturing Engineering, QUT”. Tests conducted have revealed superior JetFan performance. The technology used has been clearly explained under “Creating the JetFan Revolution”. The plans highlights how the technology works due to the movement of “converging passage ways” instead of blades. This has been efficiently shown using the diagram of converging passage ways. So the technical assistance received from “the School of Mechanical, Medical and Manufacturing Engineering, QUT”. As per the plan in the first two to five years of the business nearly 6% to 123% of the overall revenue will remain committed for the research and development facilities. The key factors for the development of the technology have been clearly identified as- successful raising of capital, acquisition of production patents, securing supply agreements, cash flow generation for IP protection, building of brands and development of follow-on products. Manufacturing/Operations The business plan does not mention the location finalised for the purpose of initiating the new venture. The business location must be determined before hand as this is the factor that plays key role various other factors. Like the availability of transport and skilled labour. For instance if the cost of unskilled labour forms a considerable portion of the overall business expenses then ideally the business should be located in a place where there is ample supply of inexpensive unskilled labour (Portland Development Commission, 2002). But in the business plan there is no mention about the location. This implies that the plan has failed to incorporate the benefits that may arise from the business location. The business plan merely highlights that the initial phase of manufacture of impellers will commence from its existing premises in Australia. As per the plan setting up the business in Australia is lucrative as this will ensure proximity to the Asian markets. The business plan simply lays down the primary business strategy of consolidating its presence in the new markets however there is no mention of the markets that it wishes to explore. In the business plan there is no mention about any agreements with the suppliers. The plan does not contain the list of potential business suppliers. It is an important aspect and the plan has failed to cater to this requirement. This is because the relationship with the suppliers plays a crucial role in the business. If there are a good number of suppliers then the business retains an extensive amount of bargaining power. Moreover these suppliers can also benefit the business by providing products or services at cash discounts. However, as the plan has not outlined any list of potential suppliers it has also missed out on crucial business details. Besides the absence of location and supplier details the plan has not stated anything about the labour supply and the transportation facilities that can be availed in the area where the business is set-up. There is also no mention about the production process or the equipments that the business might need for the smooth conduct of the business. So this section presents vague information about some important business aspects making this section the weakest as compared to the other sections of this plan. Organization The organisational structure has been laid down in the form of a chart. At the top is the CEO of the company preceded by Vice presidents of various relating to Finance, marketing, R&D etc. The managers of the various departments will report to the respective vice presidents. The business plan clearly outlines the reporting authorities. This is in line with an ideal business plan that requires the inclusion of key management staff and their duties in the business plan (Admin, n.d.).The educational qualification and the academic backgrounds of the key company executives have been given in details. So the business plan has catered to an important area as the commitment and experience of the key management personnel is an important determinant of business success (Business Link, n.d.). Although the business plan clearly outlines the remuneration of the top company officials besides giving an overview of their academic background but no detail has been given about the number of employees to be hired or their remuneration package. In the plan there is a mention that the business will work in collaboration with the technical staff of Intel. This has helped the business to a great extent as an engineer from the Intel unit made recommendations about the right size and number of fans to be installed for a better cooling. The plan also states that the business is likely to benefit significantly from such technical collaborations. The legal form of the business has been stated to be a public limited company. This reason cited for this legal framework is to raise adequate equity capital required to construct the production plant and for establishing a presence in the market. There is no mention about the license or permits that business will require. Overall this section covers all the important aspects like organisational structure, flow of authority, details of key business employees etc but again there have been lapses in areas like employees details as the plan does not indicate anything about these aspects. Critical Risks The possible risk that may arise in the due course of the business has been highlighted very well in the section “Risk Reduction Strategies”. The management of risk forms an important part of planning of business (UNCTAD, 2000). The business plans outline nine areas including incorrect pricing, failure of technology, weak patent protection etc that are prone to uncertainties. For each of the possible risks that the business may face the necessary strategy for the reduction of risk has been mentioned. The business plan scores fairly well in outlining the potential risks that the business may face. In fact the plan not just identifies the risks but also has devised strategies for tackling such risks. Milestone Schedule The project timings i.e. the complete time for the project to set rolling has not been mentioned in the business plan. This is a crucial area that the business plan has missed out. The objectives of the business have also not been clearly outlined. A business plan serves as a barometer of assessing the achievement of business objectives but this area has been totally left out in the JetFan business plan (Cranfield School of Management, n.d.). The time required for the completion of the various stages of the project has also not been given in the plan. The plan does not score on this aspect as there is indication about the SMART targets or any such details. Appendix The projections of the business and important financial assumptions have been laid down in the body of the plan. Charts have also been used to depict some technical aspects as well as for showing the chain of hierarchy. However, there is no mention of the references in the plan. This raises questions about the credibility of important facts and figures that have been used in the business plan. All the sources used in the text do not contain a proper source. On the whole this section does not score high. Considering the sparse details in the appendix it has failed to include some significant aspects. Item 2 Estimated business income The revenue of the business has been forecasted as $2.5M, $6.2M, $13.8M, $20.6M and $26.0 M for the year 1, year 2, year 3, year 4 and year 5 respectively. The Earnings before interest and taxes (EBIT) has been estimated as -$1.1 M, $0.81 M, $3.1 M, $4.6M and $5.7M for the year 1, year 2, year 3, year 4 and year 5 respectively. The business plan shows that the business will be profitable from the second year onwards. However in the first year there is likely to be a net loss. Though the plan gives details of the expenditures and revenues on a yearly basis there is no detail about the monthly income or expenditure of the business. In other words the business plan analyses the financial prospects from an annual perspective and has not presented the monthly statement of income or loss. The market size has been estimated as $406M, $508M, $559M, $609M and $652M for the year 1, year 2, year 3, year 4 and year 5 respectively. The growth in the market has been anticipated to be 15.0%, 10.0%, 9.0%, 7.0% and 7.0% for the year 1, year 2, year 3, year 4 and year 5 respectively. As per the business the growth will be highest in the initial years but will drop towards the later years as is reflected from the fall in the market growth figures. This is mainly because after a certain point of time the business reaches the maturity stage leaving little room for expansion. However the business plan shows that despite the falling growth rate the business is expected to keep up its market penetration. The market penetration has been forecasted as 0.3%, 1.1%, 1.5%, 2.25% and 2.85% for the year 1, year 2, year 3, year 4 and year 5 respectively. This is expected to result in higher sales of units for the business. The units sold have been forecasted to increase from 594000 units in the year 1 to 18587000 units in year 5. The growth pattern of sales volume has been depicted as 594,000, 3,474,000, 8,388,000, 13,714,000 and 18,587,000 for the year 1, year 2, year 3, year 4 and year 5 respectively. The rise in the sales volume is also reflected from the increasing revenue pattern. The forecasted level of sales over the five year period has been anticipated to grow continuously. Financial assumptions The business plan has assumed a time horizon of 5 years and has also taken account of the terminal value. The figures expressed in the tables are in terms of US dollars. The capital requirements of the business have been based on industry averages. This is a good assumption as for a new business the figures relating to the industry can serve as a possible benchmark. However there is a limitation to this assumption. The industry average is computed by taking the large sized as well as small sized business but the figures thus obtained may not be an accurate indicator of the industry scenario. Ideally the business should have matched its figures with an industry player of an equivalent size. The amount spent on capital expenditures such as acquisition of equipments and plants has also been based on the industry data. This may result in some deviations as the amount forecasted may either be too small or too big. If the industry comprises mainly of large players then the capital expenditure forecast may be an overestimate. On the other hand if there are a number of small players in the industry then the figure may be understated as the capacity of a small business is obviously limited. Ideally the business should have based its forecasted estimates on a similar sized player in the market. The estimates relating to growth in the market and expected market size has been obtained from the IBIS services and Gartner Group. These seem to be accurate as these data are generally computed after conducting adequate primary research. They are not based on mere industry estimates and hence can give a fair picture of the possible business scenario in the future. Summarised financial results In this section the sales have been forecasted to be $1.1 M, $6.2M, $13.8M, $20.6M and $26.0M for the year 1, year 2, year 3, year 4 and year 5 respectively. The sales expected in the first year differ from the forecasts of the Gartner Group. The business expects to generate a sales volume of $1.1 million as compared to the forecast of $2.5 million by Gartner Group. The Gross margin has been expected to move up with time in terms of amount. But the percentage of gross margin is expected to decline in the latter years. While the Gross margin amount has been given as $0.49M, $2.64M, $5.8M, $8.0M and $9.9M for the year 1, year 2, year 3, year 4 and year 5 respectively, but the margin in percentage terms is expected to be 43%, 43%, 42%, 39% and 38% for the year 1, year 2, year 3, year 4 and year 5 respectively. The EBITDA forecast has been expected to be -$1.0M, $0.89M, $3.3M, $47M and $5.9M for the year 1, year 2, year 3, year 4 and year 5 respectively. Like the pre-tax margin the net profit after tax has also been assumed to rise from the second year onwards after which it has been anticipated that the business will be able to sustain the growth in the profits. The net profit is expected to be -$0.69M, $0.47M, $1.9M, $2.8M and $3.6M for the year 1, year 2, year 3, year 4 and year 5 respectively. The cash balance has been assumed to be low in the initial years. This may be because in the formative years a business has to spend heavily on advertising and promotions. This may be one of the reasons for the low cash balance in the initial years. In the latter years the cash balance has been expected to move up. This could be because during the latter years the business is able to reap the benefits of the promotional efforts expended in the initial phase. Anticipated returns The operating cash flows have been expected as -$1.01 million, $0.89 million, $3.298 million, $4.72 million and $5.9 million for the year 1, year 2, year 3, year 4 and year 5 respectively. This shows that the initial years the expenses incurred by the business are expected to be more than the earned revenues resulting in a negative net operating cash flow. But this will pick up in the later years by virtue of higher market penetration. The net financing or investing cash flows has been assumed to be negative for all the years from year 1 to year 4. It is assumed that the business will spend extensively in various avenues in the forthcoming years. For the fifth year it is assumed that the net cash flow financing or investment activities will be negative. It implies that in this year the finances raised by the business will be in surplus of the planned investment resulting in a positive figure. The cash flow to the equity investors is expected to negative in the first two years. This may be because the business does not expect stupendous revenue from the very first year of the operation. However from the third year onwards the business is expected to churn positive cash flows for its equity investors. the cash flows for the equity holders has been assumed to be -$1.5 million, -$0.17 million, $1.51 million, $1.08 million and $40 million for the year 1, year 2, year 3, year 4 and year 5 respectively. The NPV of the business has been estimated to be $0.782 million. A positive NPV implies that the business is expected to create a positive value for the investors. It suggests that the expected present value of future cash inflows will be higher than the expected business outflows (Brigham & Ehrhardt, 2010, p.383, Pietersz, 2011). The Internal Rate of Return (IRR) has been assumed to be 48%. The IRR measures the rate at which the NPV is zero (Investopedia-a, 2011).If this rate is more than the cost of capital the business is profitable otherwise not (p.364). Based on the NPV and IRR criteria the business looks profitable. The business plan has also prepared a sensitivity analysis table. This table depicts the vulnerability of EBIT due to fluctuations in the sale price, market growth, gross margin and overhead expenses. Besides this the effect on EBIT in the case of best and worst possible scenarios has also been estimated. Lapses The business plan does not mention any data for the monthly period rather all the financial data have been given on annual basis. A business may have varying sales level for different months. This happens on account of seasonal fluctuations but this has not been taken care of in the business plan. As the financial data is annual it is not possible to get any idea relating to seasonal variations in the level of sales. The data relating to each quarter has also not bee given in the business plan. Presenting the monthly figures is important as this helps in determining the monthly needs of the business. There is no detail relating to break even point. This is the point at which the business is just able to recover the costs i.e. it is a no profit no loss situation (Pinson, 2008, p.98; Investopedia-b, 2011). The business plan does not mention anything about the break even point. Besides there is no figure relating to sales that would help the business in yielding profits in the first three years. The business must ideally make a plan of the various level of sales that will enable it achieve profits. However, there is no such detail in the plan of JetFan. The projections that the business plan contains is relating to a period of five years implying that the plan has incorporated a considerable time span. The plan also comprises a sensitivity analysis whereby the impact of change in the key variable on the profitability of the business has been shown. Though the plan contains forecasted estimates relating to revenue and profits margins there is no table in the body of the plan showing any asset and liabilities projections. The assets form the base of the business as the revenue of the business depends on the assets employed in the business. The expected revenue for the period of five years has been given but the absence of any asset or liability projection puts a question mark on the reliability of such estimates. This raises a question on the cash flows especially the net cash flow from financing or investing activities. In the absence of any asset projection in the body of the plan the reliability of the cash flow estimates comes under the scanner. The various sources of funding that the business plans to use have not been mentioned in details. It has been mentioned in the plan that it will raise equity for the production and construction activity however there is no direct reference about any other funding avenues. The security that can be furnished for loans has also not been mentioned. For big loans the business has to mortgage an asset as guarantee. The business plan does not offer any details relating to the securities to be pledged or for that matter any form of debt assistance that the business may opt for in the future. Overall it can be said that the financial plan is not very sound. The financial projections have been done for a considerable length of time but the reliability or the basis of these projections does not appear to be satisfactory. Reference Admin. (No Date). Several Factors in Business Plan Writing. Business Planning Strategy. Available at: http://www.davidjoly.org/several-factors-in-business-plan-writing [Accessed on May 1, 2011]. Brigham, F.E. Ehrhardt, C.M. (2010). Financial Management: Theory and Practice. Cengage Learning. Business Link. (No Date). Value and market your business. Available at: http://www.businesslink.org/bdotg/action/detail?itemId=1074411173&type=RESOURCES [Accessed on May 1, 2011]. Cranfield School of Management. (No Date). The importance of ongoing business planning. Prepare a business plan for growth. Available at: http://www.businesslink.org/bdotg/action/detail?itemId=1074447403&type=RESOURCES [Accessed on May 1, 2011]. Gitman, J.L. (2007). Principles Of Managerial Finance, 11/E. Pearson Education. Investopedia-a. (2011). Internal Rate Of Return – IRR. Available at: http://www.investopedia.com/terms/i/irr.asp [Accessed on May 1, 2011]. Investopedia-b. (2011). Breakeven Point – BEP. Available at: http://www.investopedia.com/terms/b/breakevenpoint.asp [Accessed on May 1, 2011]. Pietersz, G. (2011). NPV (net present value). Available at: http://moneyterms.co.uk/npv/ [Accessed on May 1, 2011]. Pinson, L. (2008). Anatomy of a business plan: the step-by-step guide to building your business and securing your company's future. aka associates. Portland Development Commission. (2002). What factors matter?. Location Factors. Available at: http://www.portlanddev.org/programs/ed/strategy/PDFs/appendix-2-3.pdf [Accessed on May 1, 2011]. UNCTAD. (2000). 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