- January 19, 2021
- Posted by: Ramkumar
- Category: Strategy
How To Use The Business Plan As A Communication Document
In the past, we have seen companies that failed because they did not satisfy an essential and sustainable customer need better than their competitors. Bad ideas, even if well executed, are yet bad ideas. The same philosophy extends to mergers and acquisitions (M&A). A poorly designed business strategy is amongst the reasons usually given when M&A disappoints to meet expectations. Some companies view M&A as a business growth strategy. In my opinion, M&A is not a business strategy but rather a means of implementing a business strategy. While firms may accelerate overall growth in the short run through acquisition, the higher growth rate often is not sustainable without a business plan—which serves as a road map for identifying additional acquisitions to fuel future growth. Here, i share my insights on how to use the business plan as a communication document.
The Business Plan As A Communication Document
The business plan is an effective medium for communicating with key decision-makers and stakeholders. A solid business plan should be concise, focused, and well documented. The executive summary is the most important and challenging piece of the business plan to draft. It must communicate succinctly and compellingly what we recommend, why we recommend achieving it, and when. It must also identify the significant resource requirements and risks associated with the critical assumptions underlying the plan. The executive summary is usually the primary and only portion of the business plan read by a time-constrained CEO, lender, or venture capitalist. As such, it may represent the first and last chance to catch the attention of the key decision-maker.
Characteristic Business Unit-Level Business Plan Construction
- Executive summary: In one or two pages, explain what you are proposing to do, why, how it will be achieved, by what date, critical assumptions, risks, and resource requirements.
- Industry/market definition: Establish the industry or market in which the firm competes in size, growth rate, product offering, and other relevant characteristics.
- External analysis: Define industry/market competitive dynamics in influencing customers, competitors, potential entrants, product or service substitutes, and suppliers and how they communicate to determine profitability and cash flow. Discuss the significant opportunities and threats that exist because of the industry’s competitive dynamics. The Strategy teams should use information accumulated in this section to develop the assumptions underlying revenue and cost projections in building financial statements.
- Internal analysis: Explain the company’s strengths and weaknesses and how they contrast with the competition. Identify those strengths and weaknesses crucial to the firm’s targeted customers, and describe why. Strategy teams can use this data to elaborate cost and revenue assumptions underlying the businesses’ projected financial statements.
- Business mission/vision statement: Describe the company’s purpose, what it aims to achieve, and how it wants to be regarded by its stakeholders. For instance, an automotive parts manufacturer may envision itself as being perceived in the next three years as the leading supplier of high-quality components globally by its customers and as fair and honest by its employees, the neighborhoods in which it operates, and its suppliers.
- Strategic objectives: Show both financial goals (e.g., rates of return, sales, cash flow, share price) and non-financial goals (e.g., market share, product quality, price, innovation).
- Business strategy: Identify how the strategy team will achieve the mission and objectives (To be a cost leader, use a differentiation strategy, concentrate on a specific market, or combine them). Explain how the determined business strategy meets a critical customer need or builds on the firm’s signature strength. A firm whose customers are highly price-sensitive may seek a cost leadership strategy to reduce selling prices and grow market share and margin. A firm with a reputation and a brand name may prefer a differentiation strategy by supplementing features to its product that its customers regard as relevant.
- Implementation strategy: From a scale of right options (i.e., organic growth; JV/Partnerships/Alliances, license, or minority investment; or acquire–merge), recommend which alternative would allow the firm to achieve its preferred business strategy best. Show why the preferred implementation strategy is better than choices. An acquisition strategy may be better if the perceived “window of opportunity” is assumed to be short. A standalone venture may be better with a few attractive acquisition targets, or the firm thinks it has the resources to develop the needed processes or technologies.
- Functional strategies: Identify programs and resources needed by major functional areas, including HR, Engineering, Sales and Marketing, R&D, Finance, and Legal.
- Business plan financials and valuation: The business team should give forecasted annual income, balance sheet, and cash flow statements. Following this, estimate the value based on the projected cash flows. State key forecast assumptions that are underlying the projected financials and valuation.
- Risk assessment:
- Assess the likely impact on a valuation by modifying chosen key assumptions one at a time.
- Succinctly identify contingency plans (i.e., alternative ways of delivering the firm’s mission or objectives) that would get engaged if significant assumptions prove incorrect.
- Identify specific events that would induce the firm to pursue a contingency plan.
- Such “trigger points” could include variations in revenue growth of more than x% or the failure to acquire or develop a wanted technology within a definite period.
I have seen many strategy teams shudder at developing a structured business planning process because they think it may delay responding to opportunities, both anticipated and unanticipated. Anticipated opportunities are those known as a result of the business planning process:
- Understanding the firm’s external operating environment
- Assessing internal resources
- Reviewing a range of options
- Articulating a clear vision of its future and a realistic strategy for achieving that vision
Unanticipated opportunities may emerge as new information becomes available. Having a well-designed business plan does not delay pursuing opportunities; instead, it provides a plan to quickly and substantively evaluate the opportunity by determining how it supports the business plan’s realization.