Business Studies
Topic 4:
Preliminary Course
Developing a Business Plan
Section 4.2:
The Business Planning Process
Section Overview:
4.2.1
Sources of planning ideas from internal and external business environments
– SWOT analysis
– market analysis
– target market identification
4.2.2
Vision, mission and goals
– purpose of vision and mission statements
– types of goals
– allocation of goals to functional areas
4.2.3
Forecasting
– break-even analysis
– decision trees
– budgets
4.2.4
Monitoring and evaluations
4.2.5
Types of control
– sales
– market reports
– budgets
4.2.6
Taking corrective action
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Section 4.2
The Business Planning Process
4.2.1 Sources of Planning Ideas from Internal and External Business
Environments



SWOT Analysis
Market Analysis
Target Market Identification
In developing a business plan, it is essential that managers/owners obtain as much
information as possible from both internal and external sources. The more the information,
the better able they will be to develop practical ideas and successful business plans.
Internal sources include employees, managers, paid consultants, sales representatives and
customers.
External sources include activities of the competition, trade journals, government agencies
(i.e. Australian Bureau of Statistics, Reserve Bank), newspapers and news services, suppliers,
the internet, research organisations, and banks/accountants/solicitors.
Many businesses obtain specialized information about their business/industry from tools
such as SWOT Analysis, Market Analysis and Target Market Identification. These will
now be considered in turn.
A)
SWOT Analysis
SWOT ANALYSIS is a method of business planning which considers both the
internal and the external economic environment. A SWOT analysis involves a
review of the Strengths, Weaknesses, Opportunities and Threats that face a
business.

Strengths:
The strengths of a business are the advantages the business has which
will help it to succeed. They are those things which the business does
better than its competitors. (i.e. excellent customer service)

Weaknesses:
Weaknesses are problems which the business needs to overcome so it
can maximize its potential. They are those things which the business
does not do as well as the competition. (i.e. machinery is old & slow)
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Section 4.2
The Business Planning Process

Opportunities:
The opportunities of a business are the characteristics of the marketplace that will have positive flow-on effects for the firm if they are
exploited. (i.e. economic conditions are improving)

Threats:
Threats are aspects of the marketplace which are potentially or
currently having an adverse effect on the business. Threats need to
be addressed so that the business can maximize its potential. (i.e. the
market for product X is declining)
Strengths and weaknesses stem from the internal business environment, while
opportunities and threats arise from the external environment.
B)
Market Analysis
A market analysis is a description of the market or markets in which a business
intends to compete. It involves collecting information and identifying important
facts and trends to do with customer needs, competitors, consumer confidence and
potential customers. The market analysis should include information about:









The size of the potential market
What market trends might affect the business (i.e. seasonality factors)
Any parts of the market which are not being serviced by other businesses
How many competitors there are
How the competitors are performing
Who the customers are
What their characteristics are
How the market could be segmented
Which segments the business will target
This information can be obtained from reports from sales staff, questioning existing
and potential customers by means of filling in survey forms (questionnaires),
interviews of selected people (focus groups) and even informal chats.
The results of the market analysis will impact on the business plan, providing
managers with ideas about the markets they are selling in, their characteristics and
the marketing strategies that will be needed.
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Section 4.2
C)
The Business Planning Process
Target Market Identification
Modern businesses do not try and sell their product/service to everyone. They
identify and then concentrate their marketing efforts on those people who are most
likely to buy their product. These groupings of people are known as the Target
Market. Having identified potential customers (our target market), it is then
possible to segment this market further by grouping similar customers together.
For Example:
The potential customers for Qantas may be business travelers and leisure travelers.
Within these two categories, we may be able to further categorise those business
travelers who travel frequently and those that don’t. We could further categorise
these business travelers based on age, sex, social class, occupation etc. Having
identified and segmented our target market, it is now possible to concentrate
appropriate marketing efforts towards these people. It may be appropriate to
advertise in the Financial Review or Business Review Weekly, or run an add on TV
during Business Sunday.
4.2.2 Vision, Mission and Goals



A)
Purpose of Vision and Mission Statements
Types of Goals
Allocation of Goals to Functional Areas
Purpose of Vision and Mission Statements
A VISION for a business gives it an overall direction. It is usually formed by
answering the question:
“What do we want to achieve in this industry?”
It is often the initial vision that is translated into a mission statement.
A MISSION statement is a formal statement that tells the outside world why your
business exists and what it aims to achieve. It is also the basis for providing the
people who work in the business with a sense of what they are there for. It gives
them a clear understanding of the purpose of the business and what it and they are
trying to achieve.
4
Section 4.2
For Example:
The Business Planning Process
The mission statement for “The Original Pretzel Company”
“To become nationally and internationally respected as a
successful manufacturer of premium quality snack foods”.
B)
Types of Goals
Having determined the mission, the next question that a business must ask is:
“What goals do we need to accomplish to make our mission a success?”
GOALS are the longer-term intentions of a business. Achieving goals will directly
contribute to part of the success of the mission. Good goals will be clear,
measurable and attainable. There are three main types of goals: financial, social
and personal. (These have been covered in Section 1.1.4)
C)
Allocation of Goals to Functional Areas
Having determined the goals, the next step is to break up the goals into targets for
the different functional areas of the business. e.g. operations, marketing, finance,
human resources. (Consider Example on P.258 of Heinemann Text)
For Example:

Operations is concerned with the actual process of planning and controlling all the
activities necessary to achieve the prime function of the business.

Marketing is responsible for achieving goals related to market growth: achieving a
desired level of sales, and maintaining and improving market share.

Finance and administration is responsible for the ‘bottom line’ of the business,
thus this function will be mainly concerned with achieving the financial goals of the
business.

Human resources is responsible for hiring people with the best mixture of skills,
experience and suitability for the workplace.
This is one of the key challenges in the business planning process: managers must
decide which functional areas are responsible for which goals, and this must be
communicated effectively to middle and lower management for their plans.
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Section 4.2
The Business Planning Process
4.2.3 Forecasting



Break-even Analysis
Decision Trees
Budgets
FORECASTING is the process of making predictions about the future. Where you expect
the business to be at a specified point in the future. Accurate forecasts are extremely
important, although they are not always easy to make. Like the person caught on a
scorching hot day in clothes more suited to winter, managers who do not use forecasting
techniques are exposing themselves to financial punishment. These risks can be reduced by
using forecasting techniques such as break-even analysis, decision trees and budgets.
A)
Break-even Analysis
Break-even analysis is a technique planners use to gain information on the minimum number
of units of a product which must be sold to break-even. The BREAK-EVEN POINT is
the level of sales where sales revenue equals the total of fixed and variable costs. (The point
at which neither a loss or a profit is made).
The break-even point can be calculated by using the formula:
Total Fixed Costs
Break-Even Point =
___________________________
Unit Price – Variable Costs Per Unit
For Example:
The Widget manufacturer, Widgets and Co intends to introduce a new line of widgets. The
unit price has been estimated at $15, total fixed costs at $200 000 and variable costs at $10.
The break-even point is calculated as:
BEP =
$200 000/($15 - $10)
6
=
40 000 units
Section 4.2
The Business Planning Process
Break-Even Analysis
1000000
900000
Revenue/Costs ($)
800000
700000
Fixed Cost
600000
Variable Cost
500000
Total Revenue
400000
Total Cost
300000
200000
100000
0
00
0
00
60
0
55
0
00
50
0
00
45
0
00
40
0
00
35
0
00
30
0
00
25
0
00
20
0
00
15
00
00
10
50
0
0
Output In Units
The graph indicates that if production occurs below the break-even point then a LOSS will
result. On the other hand, a PROFIT will be made if production is above the break-even
point.
B)
Decision Trees
Decision making is the basis of planning. It is about selecting a particular course of action
from a range of alternatives. This can be quite a complex task, especially if there are a
number of possible alternatives to choose from, each with a different set of consequences.
One of the tools used to assist people in making decisions is called a DECISION TREE.
A decision tree is a tree-like graph which assists planners and managers in decision making.
The usefulness of decision trees is best illustrated through use of an example.
7
Section 4.2
The Business Planning Process
What should the board do? A decision as to where the next branch of the company should
be built has to be made. Three alternatives exist: Penrith, Albury and Tamworth. The
expected profits for the first three years in each location, divided into high, average and low
are:
Penrith
Albury
Tamworth
$900 000
$800 000
$800 000
$400 000
$400 000
$400 000
$200 000
$300 000
$200 000
The probability of these levels of profit occurring in each location are Penrith: 0.3, 0.5 and
0.2; Albury: 0.3, 0.4 and 0.3; and Tamworth: 0.6, 0.3 and 0.1.
Construct the decision tree and determine which location would be best.
STEP 1:
Define the problem.
Whether to build the next branch of the company in Penrith, Albury or
Tamworth.
STEP 2:
Draw the decision tree showing the alternatives.
Decision
Point
Alternatives
Chance Point
0.3
High
$900 000
0.5
Average
$400 000
Low
$200 000
0.3
High
$800 000
0.4
Average
$400 000
Low
$300 000
0.6
High
$800 000
0.3
Average
$400 000
Low
$200 000
0.2
Penrith
Albury
Expected
Payoffs
Probabilities
0.3
Tamworth
0.1
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Section 4.2
The Business Planning Process
STEP 3:
Give each of the outcomes a probability.
STEP 4:
Estimate the payoffs or value for each ‘branch’ of the tree – each
combination of alternatives and outcome.
STEP 5:
Solve the problem by calculating the expected monetary values for
each outcome.
Penrith:
High
Average
Low
=
=
=
(0.3 * $900 000)
(0.5 * $400 000)
(0.2 * $200 000)
=
=
=
$270 000
$200 000
$40 000
$510 000
High
Average
Low
=
=
=
(0.3 * $800 000)
(0.4 * $400 000)
(0.3 * $300 000)
=
=
=
$240 000
$160 000
$90 000
$490 000
High
Average
Low
=
=
=
(0.6 * $800 000)
(0.3 * $400 000)
(0.1 * $200 000)
=
=
=
$480 000
$120 000
$20 000
$520 000
Albury:
Tamworth:
Clearly, Tamworth appears to be the best option.
C)
Budgets
A BUDGET is an estimate or forecast in dollar or non-dollar terms of things like revenue
and expenditure, labour hours and units of production. They are used to guide and control
the firm’s activities so its targets and objectives can be achieved. There are many different
kinds of budgets:
Sales Budget:
A forecast of the expected sales for a period of time.
Cash Flow Budget: A projection or forecast of the amount of cash that will be flowing
into and out of a business over a given period of time.
Revenue Budget:
Summarises the activities of a business over a period of time and
forecasts revenue from sales, expenses that will be incurred and the
profit or loss that results.
Capital Investment: A type of budget that lists the resources that will be needed to
implement the proposed marketing and production strategies.
9
Section 4.2
The Business Planning Process
4.2.4 Monitoring and Evaluations
The implementation of the plan is by no means the end of the business planning process. If
a plan is to be of benefit to a business, it requires ongoing MONITORING and
EVALUATION. This process is broadly known as control and asks the question:
Are we achieving what we planned?
The control process involves comparing established targets with actual outcomes. If any
significant difference exists between the benchmarks and actual performance, the reasons
behind the differences must be evaluated.
4.2.5 Types of Control



Sales
Market Reports
Budgets
CONTROLLING is concerned with comparing the actual performance of the firm with its
planned performance and taking corrective action where necessary. There are many
different types of controls that managers can use, for example controls on inventory or stock
levels, on various stages during the production process, on sales, on cash flow, on labour
costs and on what people do.
A)
Sales Reports
The sales report is a vital monitoring tool because it helps managers to discover the
reasons behind sales variations. Sales reports can be formatted in a number of
different ways and when these are analysed together, a good picture of what has
happened and what needs to be done emerges.
A sales analysis breaks down the total business sales into groups such as sales by
product, by market segment, by individual salespeople and by individual sales
territories. This can be seen in the example below. (Figure 4.2.1)
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Section 4.2
The Business Planning Process
Product
Product
Salesperson
Jones
Wang
Area
City
Country
Figure 4.2.1
B)
Actual
Budget
Variance
A
B
20 000
15 000
35 000
25 000
15 500
40 500
(5000)
(500)
(5 500)
A
B
A
B
9 000
9 000
11 000
6 000
35 000
15 000
9 000
10 000
6 500
40 500
(6 000)
0
1 000
(500)
(5 500)
A
B
A
B
18 000
9 600
2 000
5 400
35 000
20 000
10 000
5 000
5 500
40 500
(2 000)
(400)
(3 000)
(100)
(5 500)
Sales analysis report by product, salesperson and area, July 2002.
Market Reports
To conduct a thorough analysis of performance, the firm’s sales volume should be
compared to the industry as a whole. This is done through a market report. This
involves determining the business’s share of the total market. An example can be
seen in Figure 4.2.2 below.
Year
1998
1999
2000
2001
2002
Woods Company
Sales
($m)
18
22.5
28
33
36
Figure 4.2.2
Industry
Sales
($m)
120
155
200
255
300
Woods Company’s
Share of Market
(%)
15
14.5
14
13
12
Market share analysis for Woods Company Pty Ltd
11
Section 4.2
C)
The Business Planning Process
Budgets
Budgets are an extremely versatile planning tool. They are used for forecasting (as
seen earlier) and as a control when managers are monitoring what is actually
happening in the business. Look again at the budget in Activity 3. Did you notice
the ‘actual’ columns? These enable managers to enter the actual figures once that
point in time is reached and the actual figures are known. The budget then becomes
a tool for control because managers can compare what actually happened with what
they budgeted for.
4.2.6 Taking Corrective Action
The process of control would be of little use if it did not result in changes to address
problems detected in the strategies or plans of the business. There are three ways in which
managers can respond to these problems:
Option 1:
Do nothing
If the manager believes that problem’s in the firm’s performance are of a
temporary nature and are due to external factors that are out of the control
of the business, he or she may choose to do nothing. For example, a
business that sells overcoats may record sales below expectations due to a
particularly warm winter. The manager may deal with the problem by simply
hoping that the weather is cooler next year.
Option 2:
Make changes to some aspect of the way the business operates
If the process of monitoring and evaluation reveals that the firm is
underperforming because of some of its current strategies, the firm should
make changes to its operations. For example, if profits are lower than
planned due to inefficiency among employees, a possible solution would be
to implement training courses to improve staff productivity levels.
Option 3:
Change the plan
It is possible that targets set out in a firm’s plan were not met because the
goals set are unrealistic. If this is the case, managers may choose to update
the plan with the extra information that they now have, including budgets
and forecasts that more accurately reflect the potential of the business.
Business plans should be flexible, to adjust for changing conditions and new
information.
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Section 4.2
The Business Planning Process
DEFINITIONS:
Budget
An estimate or forecast in dollar or non-dollar terms of things
like revenue and expenditure, labour hours and units of
production.
Break-Even Point
The level of sales where sales revenue equals the total of fixed
and variable costs.
Controlling
A management function which assesses the performance of a
business.
Decision Tree
A tree-like graph which assists planners and managers in
decision making.
Evaluation
Involves comparing actual performance with planned
performance and deciding what action needs to be taken if
any.
Forecasting
Predicting what will happen in the future.
Goals
The longer term intentions of a business.
Mission
Desired aim of a business, usually incorporated into a mission
statement about the business. It outlines the overall aims and
activities of the business.
Monitoring
Is the regular checking and measuring of what actually
happened in the business.
Objectives
Precise statements of intent which reduce goals to achievable
purposes.
Strategies
Are the actions you need to implement in order to achieve an
objective.
SWOT Analysis
Strengths, weaknesses, opportunities, and threats analysis.
An investigation which looks at the current business situation
in terms of both internal and external factors.
Vision
A broad future projection of the business, as perceived by the
owners or planners of the business.
13
Section 4.2
The Business Planning Process
HOMEWORK ACTIVITIES:
Activity 1:
Complete Business Brief 5.3 on P.254/255 of Heinemann Text.
Activity 2:
Write a brief SWOT analysis for the following:
a)
b)
Activity 3:
The King’s School
Qantas
Frank has recently become CEO of a major bank. A colleague has pointed
out that no one has ever written a mission statement for the bank and has
suggested that one be prepared.
a)
b)
c)
d)
Define what is meant by a mission statement.
Write a brief mission statement for Frank’s bank.
Analyse the importance of mission statements as a part of the
business planning process.
Discuss how a mission statement can help both internal and external
stakeholders.
Activity 4:
Calculate the break-even sales, given fixed costs of $30 000, variable costs of
$90 000 and sales of $100 000. Graph this data.
Activity 5:
Suppose it cost Sam a total of $100 to start up a fruit stall at the train station.
Sam sells each piece of fruit for 50 cents.
a)
b)
c)
d)
e)
Activity 6:
What dollar value of fruit will Sam have to sell in order to break
even?
How many pieces of fruit will this be?
If Sam sells twenty pieces of fruit each day, how long will it be before
he breaks even?
Suppose Sam became ill after one week (five working days) and was
unable to operate his business. Would he have made a profit? If not,
how much would he have lost?
Why is it important to forecast the break-even point of sales if you
are about to establish a business?
Complete the Competencies and Skills Activity on P.263 of Heinemann Text.
14
Section 4.2
The Business Planning Process
Activity 7:
What is the difference between monitoring and evaluation?
Activity 8:
Study the cash flow budget below.
April
Budgeted
$
Cash receipts
Cash from sales
Cash from investments
Total Cash Receipts
Cash payments
Stock
Payroll
General expenses
Purchase of assets
Loan repayments
Dividend payments
Total Cash Payments
Net Cash Gain/(Loss)
a)
b)
c)
d)
e)
Activity 9:
May
Actual Budgeted
$
$
June
Actual
$
Budgeted
$
10 000
1 000
11 000
14 000
1 000
15 000
10 000
1 000
11 000
1 000
2 000
500
1 000
500
1 000
6 000
5 000
2 000
2 000
600
500
500
1 000
6 600
8 400
1 000
2 000
800
8 000
500
12 300
(1 300)
Actual
$
How many months is this budget for?
What are the sources of cash for this business?
How much cash does the business have at the end of each of the
months April, May and June?
What is forecast to happen in June that causes a shortfall in the cash
position of the business that month?
What are the ‘Actual’ columns for?
Refer to Figure 4.2.1 and answer the following questions.
a)
b)
c)
d)
e)
f)
g)
What information could a manager get from this report?
Which of the two products, A or B, sold the most in July?
How much of Product A was sold by salesperson Jones?
How did this compare to what was budgeted?
What was the value of the sales of Product B made in the country?
How did this compare to budget?
How might this sales report help the sales manager and the sales
team?
15
Section 4.2
Activity 10:
The Business Planning Process
Refer to Figure 4.2.2 and answer the following questions.
a)
b)
c)
d)
Activity 11:
What information does this analysis give the managers of Woods
Company?
What happened to company sales from 1998 to 2002?
What has been the trend in the company’s market share for the fiveyear period?
Suggest two possible reasons for this trend.
Complete the following passage by filling in the missing words from those
listed below:
activity, analysis, break, budgets, control, corrective, decision,
evaluation, external, financial, functional, forecasting, feedback,
internal, long, managers, mission, market, monitoring, translate,
management, operational, objectives, prime, projections, target,
planning, reports, strategic, social, sales, standards, tactical,
usefulness, variations.
The ___________ plan for any business outlines the ______ -term goals. A
common problem with small businesses is the reluctance of __________ to
believe in the ____________ of strategic planning. A __________ plan
outlines how the strategic plan will be achieved, while _____________ plans
set out activities planned for a particular period. The first step in the
strategic plan is to decide what the business __________ will be. Then,
planners can develop the _________ statement, the _______ function and
the objectives. Sources of planning ideas will come from the __________
and __________ environments. Apart from SWOT __________ and
________ analysis, ________ market identification will focus on where the
business should aim to sell its output. The main goals of a business can be
classified as ___________, _________ and environmental.
Various
____________ areas of the business will ___________ these goals into
____________ and plans. The main tools of _____________ are financial
_____________, which include _______-even analysis, __________ trees
and _________. ____________ can occur through a ____________
information system (MIS), while ____________ occurs through
__________ controls. _______ and marketing _________ are valuable for
evaluating the success of the output in the market, while budgets act as both
a __________ and _________ tool. Managers have to take ____________
action, when there are undesirable ____________ from set __________.
16