Exam Prep The Business Planning Process Ch.8

Questions for Chapter 8

True/False

1. The chapter takes the view that the self-examination required to develop a tight, well written business plan is more important than the plan itself. (pg. 219)
2. An important end result of the business planning process is that it allows the entrepreneur to articulate the business opportunity to various stakeholders in the most effective manner. (pg. 219)
3. The business plan must establish that there is an opportunity worth exploiting and must detail how to take advantage of it. (pg. 219)
4. It’s a common misperception that a business plan is primarily used for raising capital. (pg. 219)
5. Business planning, in a literal sense, begins when you start to look for external funds. (pg. 220)
6. Your business plan should be designed to be flexible, to allow for rapid adjustments as more information becomes available. (pg. 221)
7. The cover of the plan should include the following information: company name, tagline, contact person, address, phone, email, date, disclaimer, and copy number. (pg. 222)
8. Interestingly, the executive summary is the least important part of the business plan. (pg. 223)
9. Since the executive summary is the most important part of the finished plan, an entrepreneur should write that section first, in order to frame the rest of the plan. (pg. 224)
10. New ventures will have better chances for success in an emerging market, on the verge of rapid growth. (pg. 224)
11. Market analysis looks at current underserved gaps in the market, but most importantly, trends that are shaping the future. (pgs. 224-225)
12. Both positive and negative trends will help shape the businesses. (pg. 225)
13. Competitive profile matrices can aid in identifying underserved or vulnerable parts of the market susceptible to a new entrant. (pg. 227)
14. The best way for savvy entrepreneurs to gather competitive information is through talking to their family members. (pg. 228)
15. As mentioned in earlier chapters and reiterated in this chapter, “cost plus” pricing is the best strategy, because it wastes the least amount of time. (pg. 230)
16. Your distribution strategy can define your company’s fortune as much as the product itself. (pg. 230)
17. Examining how customers currently acquire similar products is a poor use of time for an entrepreneur launching an innovative, new product. (pg. 231)
18. It is appropriate to discuss the geographic location of production facilities and how this enhances your firm’s competitive advantage. (pg. 233)
19. The Scope of Operations section should discuss partnerships with vendors, suppliers, and partners. (pg. 234)
20. A development strategy includes a schedule that highlights major milestones for the venture. (pg. 235)
21. An ‘A’ entrepreneur with a ‘B’ idea is better than a ‘B’ entrepreneur with an ‘A’ idea.” (pg. 235)
22. A simple, flat organization chart is often useful to visualize what roles you have filled and what gaps remain. (pg. 235)
23. The Board of Directors’ primary role is to oversee the company on behalf of the employees, and to that end the board has the power to replace top executives if it feels doing so would be in the best interests of the staff. (pg. 237)
24. Strategic partners are required by law to be offered seats on your Board of Directors. (pg. 237)
25. It is important to explain why the team’s compensation is appropriate. (pg. 237)
26. The biggest risk any new venture faces is dilution of equity. (pg. 238)
27. Entrepreneurs often enter markets and find, to their surprise, either that direct competition does not exist, or that it is complacent and slow to react. (pg. 238)
28. All plans have risks, and a solid business plan should acknowledge critical assumptions made, the risk of those assumptions proving false, and a plan to confirm/deny those assumptions in a timely manner. (pgs. 237-238)
29. The business plan should identify the factors that may hinder development and assure that you will be able to develop the product on time and on a budget. (pg. 238)
30. The appendices of a business plan can include anything and everything that you think adds further validation to your concept but does not fit in the main parts of the plan. (pg. 239)
31. The biggest difference between an internal operation plan and the one that you might present to a potential investor is the level of detail, which tends to be greater in the disclosure to the investor. (pg. 240)
32. The key to creating a successful presentation is to use the most slides possible (pg. 241)

Multiple Choice

1. Which of the following is the primary purpose of the business planning process? (pg. 219)
   1. The process allows an entrepreneur to secure investors
   2. It provides the validation needed to convince potential employees to leave their current jobs for the uncertain future of a new venture.
   3. It can help secure a strategic partner
   4. It can help secure a key customer, or supplier.
   5. It helps entrepreneurs gain a deeper understanding of the opportunity they are envisioning
2. Which of the following is NOT a goal of business planning? (pgs. 219-220)
3. To attract various stakeholders
4. To help entrepreneurs gain a deeper understanding of the opportunity
5. To convince stakeholders of the business potential
6. To inform competitors of your intentions
7. To convince potential employees to join
8. The best way to develop a winning business plan is to: (pg. 221)
9. Have an accountant develop your financials
10. Hire your professor to write the plan
11. Go through several iterations to refine the strategy and business model
12. Don’t bother writing a plan, it is not an efficient use of time
13. All of the above
14. Which of the following is the most important part of the business plan? (pg. 223)
15. Executive Summary
16. Operations
17. Team
18. Critical Risks
19. Financial Plan
20. A proper organization is critical to making a business plan easy to read. Thus, it should include which of the following? (pg. 224)
21. Major sections
22. Sub-sections
23. Exhibits
24. Appendices
25. All of the above
26. Which of the following subsections is traditionally NOT placed in the executive summary? (pgs. 223-224)
27. Description of opportunity
28. Industry overview
29. Critical risks
30. Competitive advantage
31. Team and offering
32. Which of the following is NOT a standard subsection of a marketing plan? (pg. 224)
33. Product strategy
34. Market strategy of the competitors
35. Pricing strategy
36. Distribution strategy
37. Sales strategy
38. Many of the big names in retail revolutionized and unified fragmented markets. Which of the following should NOT be on such a list? (pg. 225)
39. Microsoft
40. Walmart
41. Staples
42. Home Depot
43. All should be on the list
44. To truly understand your customers, you MUST ___ (pg. 226)
45. tell them why they need your product
46. hire the best marketing research firm available
47. listen carefully and adapt based upon what they say
48. advertise in multiple media forms, like the Internet
49. All of the above
50. When an entrepreneur understands who his customers are, he can assess _____: (pg. 226)
51. what compels them to make purchases.
52. how his company can sell to them.
53. the cost of sales.
54. how his company can retain customers.
55. All of the above.
56. A company’s sales channels can include all of the following except: (pg. 226)
57. Internal sales stream
58. Retail
59. Internet
60. Cost reduction
61. Direct mail
62. Entrepreneurs should focus on the key success factors that often lead a customer to buy one product over another, such as___. (pg. 227)
63. Price
64. Quality
65. Speed
66. All of the above
67. None of the above
68. Which of the following is not in the contents of marketing plan? (pgs. 229-233)
69. Marketing communications
70. Growth strategy
71. Product mix
72. Pricing
73. Customer analysis
74. Advantages of a price skimming are; (pg. 230)
    1. You can gauge what price the customer is willing to pay
    2. You’ll gain increased market penetration
    3. It’s easier to lower prices than to raise them
    4. A and B
    5. A and C
75. If business planning predicts that your gross margins will be small, you would be best advised to: (pg. 230)
76. redesign your concept or abandon your concept.
77. keep your business small so that you can manage costs.
78. focus on guerilla marketing to target a niche.
79. All of the above
80. None of the above
81. Which of these identifies how your product will reach the customer? (pg. 230)
82. Target market strategy
83. Marketing communications strategy
84. Product strategy
85. Pricing strategy
86. Distribution strategy
87. What are the two methods of forecasting future revenues, as stated in the chapter? (pg. 232)
88. The comparable method and the build-up method
89. The comparable method and the distributed method
90. The distributed method and the precise method
91. The random method and the precise method
92. None of the above
93. The ______ models the sales forecast after what other companies have achieved and then adjusts these numbers for differences in things such as the age of the company and the variances in product attributes. (pg. 232)
94. comparable method
95. distributed method
96. build-up method
97. random method
98. precise method
99. In the _______, the entrepreneur identifies all the possible revenue sources of the business and then estimates how much of each type of revenue the company can generate during a given period of time. (pg. 232)
100. comparable method
101. distributed method
102. build-up method
103. random method
104. precise method
105. Which of the following is a common subsection of an Operations plan? (pgs. 233-234)
106. Operations strategy
107. Scope of operations
108. Ongoing operations
109. All of the above
110. None of the above
111. Which of the following is NOT in the operations plan? (pgs. 233-234)
112. Locations
113. Facilities and Equipment
114. Employees
115. Suppliers
116. Customers
117. The Scope of Operations section should discuss partnerships with _____? (pg. 234)
     1. Vendors
     2. Suppliers
     3. Key partners
     4. All of the above
     5. None of the above
118. In the development plan, which issue should be the focus? (pgs. 234-235)
119. Development strategy
120. Development timeline
121. Development segments
122. Both A and B
123. None of the above
124. Which of the following should NOT appear in the compensation section? (pg. 237)
     1. Salary previously earned from prior employment
     2. Salary due to employees
     3. A fixed schedule for increasing the entrepreneur’s salary
     4. None of the above
     5. Why the compensation for each employee is appropriate
125. How can entrepreneurs minimize risk? (pg. 238)
126. Market research
127. Focus groups
128. Beta testing
129. All of the above
130. None of the above
131. Considering competitor actions and reactions, which of the following would be dangerous for entrepreneurs? (pg. 238)
132. Assuming that competitors will be the same tomorrow as they are today
133. Identifying future competitors that might enter the market
134. Considering when and how your technology might become obsolete.
135. None of the above
136. All of the above
137. Which of the following is NOT a common category in the critical risks section? (pg. 238)
138. Market Interest and Growth Potential
139. Competitor Actions and Retaliation
140. Time and Cost of Development
141. Operating Expenses
142. Offering of Financing
143. Detailed information which expands upon main areas of your business plan should be included in which portion of the plan? (pg. 239)
     1. Operations
     2. Appendices
     3. Financial Plan
     4. Market Plan
     5. None of the Above
144. One of the most pressing challenges for entrepreneurs is to maintain adequate levels of cash. Which of the following is the best way to ensure that a lack of cash does not bankrupt your startup? (pg. 239)
     1. Raise initial capital
     2. Give your customers, both businesses and individuals, generous credit terms
     3. Carefully monitor your burn rate
     4. Avoid accepting too much early capital in exchange for diluting your equity
     5. Answers A and B
145. Considerations in your offering section should include (pg. 239)
     1. Asking for enough money to last 12-18 months
     2. Not asking for more money than you need
     3. Not detailing the sources and uses of funds over time
     4. None of the above
     5. A and B
     6. B and C
146. Which of the following is the key to creating visual catch-points in a business plan? (pg. 240)
147. Write long, descriptive paragraphs
148. Use clearly marked headers and sub-headers throughout the document.
149. Maintain 1-inch margins on the sides and top and ½ inch on bottom. Single spaced text.
150. None of the above.
151. All of the above
152. When writing a business plan it is best to: (pg. 240)
     1. Use a creative format to capture the investor’s attention.
     2. Lead the plan with the TEAM section because investors often focus on the team members, rather than the idea.
     3. Follow a common outline because it helps spot reading.
     4. Avoid appendices because nobody reads them.
     5. All of the above

Open Ended

1. Inexperienced entrepreneurs often believe the misconception that a business plan is solely designed as a brochure for investors. The financial benefits of using a business plan to raise capital are well known. What are some additional benefits? (pgs. 219-220)

Although a good business plan assists in raising capital, the primary goal of the process is to help entrepreneurs gain a deeper understanding of their venture and their opportunity:

• 1. Lacking a deep understanding of the business model, many would-be entrepreneurs doggedly pursue ideas that have no possibility of success.
  2. Given the enormous financial and emotional toll a failed startup can have, the weeks or months it will take to complete a thorough business plan is a relatively small investment.
  3. In comparison, the cost of launching a flawed business concept can quickly accelerate into millions in lost capital for the founders and investors.

So entrepreneurs should spend the time and money up front and go through the planning process.

1. Generally speaking, what is the greatest benefit of the business planning process? (pg. 219)

The business planning process provides the entrepreneur with the deep understanding she needs to answer the critical questions various stakeholders will ask. Completing a well-founded business plan gives the entrepreneur credibility in the eyes of each group. Subsequently, the entrepreneur understands the business and the opportunity more thoroughly and is able to better articulate both to various stakeholders.

• 1. First, the plan provides background information that enables the entrepreneur to communicate the upside potential to investors.
  2. Second, it provides the validation needed to convince potential employees to leave their current jobs for the uncertain future of a new venture.
  3. Finally, it can also help secure a strategic partner, key customer, or supplier.

1. What would be a counter-argument to the critique that business plans are obsolete soon after they are finished? (pg. 221)

Business planning, as with any planning, must be proportional to the amount and quality of available information. As start-ups often have more assumptions than facts in the early stages of a venture, an excessively detailed business plan will find most of its plans overcome by changing events. A good technique would be to develop a solid base plan, and then determine the assumption this plan depends upon, and determine how you’ll adjust your plan if those assumption prove false. Last, a deliberate plan to confirm/deny each critical assumption needs to be built into your base plan.

1. What factors should be kept in mind when we are preparing the cover of the business plan? (pgs. 222-223)
   1. First, the contact person for a new venture should be the president or some other founding team member.
   2. Second, business plans should have a disclaimer along these lines:

“This business plan has been submitted on a confidential basis solely to selected, highly qualified investors. The recipient should not reproduce this plan, nor distribute it to others without permission. Please return this copy if you do not wish to invest in the company.”

• 1. The cover should also have a line stating which number copy it is.
  2. Finally, the cover should be eye-catching.

1. What kind of information in the Executive Summary do entrepreneurs need to provide? (pg. 223)
   1. A hook to capture the reader’s attention
   2. Description of Opportunity
   3. Business Concept
   4. Industry Overview
   5. Target Market
   6. Competitive Advantage
   7. Business Model and Economics
   8. Team and Offering
   9. Financial Snapshot
2. What are the key issues in the Industry Section? (pgs. 224-225)
   1. The goal of the Industrial Section is to illustrate the opportunity and how entrepreneurs intend to capture it, thus:
      • Entrepreneurs need to provide a context, including both the current market size and how much you expect it to grow in the future.
      • Entrepreneurs need to indicate what kind of market they’re facing.
      • Another key attribute to explore is industry economics.
      • Finally, entrepreneurs need to describe the overall industry in terms of revenues, growth and future trends that are pertinent.
3. Why should entrepreneurs go out and interview potential customers, especially in the early conceptualization stages? (pg. 226)

The typical reason is too often entrepreneurs figure that if they love their product concept, so should everybody else. But even if their needs and wants are the best place to start, they must recognize that their tastes may not be the same as everyone else’s. So to truly understand customers, they need to talk and listen to them. This process also helps create a product that is more likely to gain customer acceptance. As they get closer to launching, entrepreneurs will likely have a beta customer use their product or service to further refine the concept. The key once again is that business planning is the process, not the output (written plan).

1. How should entrepreneurs introduce the basic details of their company, before moving on to a more detailed analysis of the marketing and operations plans? (pgs. 228-229)
   1. Provide a brief overview of the concept for the company, and then highlight what the company has achieved to date.
   2. Take some time to communicate the product and its differentiating features.
   3. Identify market entry and growth strategies.
   4. Finally, sell the entrepreneur’s vision for the company’s long term growth potential.
2. What are the critical risks entrepreneurs need to identify in the business plan? (pgs. 238-239)
   1. Market Interest and Growth Potential
   2. Competitor Actions and Retaliation
   3. Time and Cost to Development
   4. Operating Expenses
   5. Availability and Timing of Financing
3. What slides are useful in oral presentations of your business? (pg. 241)
4. Cover page showing product picture, company name, and contact information
5. Opportunity description, which emphasizes a customer need
6. Illustration of how the product or service solves the customer’s problem
7. Some details to better describe the product
8. Competition overview
9. Entry and growth strategy, which show how to gain access into the market and then how to grow
10. Overview of the business model
11. Team description
12. Current status with timeline
13. Summary, including how much capital the venture needs and how that investment will be used
14. What are some of the critical outcomes of competitive profile and product attribute analysis in terms of your initial business plan. (pgs. 227-230)

New entrants may not enjoy many (or any) direct competitive advantages against incumbent players, but no competitor can be strong everywhere. Analysis of competitors and products can reveal unexpected opportunities to deliver a superior value proposition to a portion of the market. This analysis can help confirm/deny the manner in which a new venture seeks to gain a foothold in the market but determining an approach that leverage your strength and while taking advantage of the competition’s relative weakness.

1. Explain the importance of finding an entry point in the market analysis that holds a substantial gross margin for a new venture. (pg. 229)

As new ventures will burn through cash according to their business plan, many other things could happen that were not expected, and many of these events will undoubtedly require cash. Marketing expenses can be higher than expected, channel partners can have greater bargaining power than predicted, and input costs can rise unexpectedly. In order to have enough working capital to continue to meet growth milestones, high gross margins provide breathing room for the unexpected. High gross margins decrease the likelihood of running out of cash between finance rounds.

1. What are the primary components of marketing plan section in a business plan? Describe them. (pg. 229-233)
   1. a description of the target market strategy
   2. the product/service strategy
   3. pricing strategy
   4. distribution strategy
   5. advertising or promotion strategy
   6. sales strategy
   7. sales and marketing forecasts
2. Describe the two different methods for sales forecasting. (pg. 232)

Comparable Method

• Models the sales forecast after what other companies have achieved
• Adjusts sales forecast for differences between the comparable companies and the entrepreneur’s company (e.g., age of the company and the variances in product attributes)

Build-up Method

• The entrepreneur identifies all the possible revenue sources of the business
• Sales are estimated from each revenue stream for a given period of time
• The build-up method is an imprecise way for a new startup to forecast sales given its limited operating history but it will help to assess the viability of the opportunity

Often both the comparable method and build-up method are used together to forecast sales. It is essential, however, to minimize the degree of error in the estimation, so careful consideration must be taken in forecasting. Rigorous estimates are the single best tool for keeping a startup out of financial trouble.

1. Discuss the importance of critical risks management in your business plan. (pgs. 237-238)

Every venture has risks. If a given return on investment is desired by an investor, then it is all too easy to adjust numbers and figure to yield a set of calculations that result in a high expected ROI. Investors are less concerned with your ability to conduct financial projections, but instead in your ability to connect the financial results to the underlying assumptions that will drive those results. The more critical assumptions that exist, the greater the perceived risk investing in your venture will be, for yourself, as well as an investor. A critical skill that can set an entrepreneur apart from others in not simply the ability to identify and assess the risks in a new venture, but to systematically confirm/deny those risks as early as possible in the life of a new venture.