MGMT 375 Test 1 (Ch. 6, 7, & 8)

Goals of strategic planning:

1. As owner, what do you expect out of the business? 2. What is your product or service idea (and its industry)? 3. For your product, how innovative or imitative will you be? 4. Who do you plan to sell to- everyone or targeted market? 5. Where do you plan to sell- locally, regionally, nationally, globally?

Cover letter

A one-page document on business stationery that introduces the business plan and the business owner to the recipient and indicates why the recipient is being asked to read the plan. Also called letterhead

Mission Statement

A paragraph that describes the firm's goals and competitive advantages Talks in terms of how it will make a difference in for the customer or the industry

Private placement memorandum

A specialized legal form of business plan crafted by lawyers for the purpose of soliciting formal investments.

7. A new business that has begun from scratch is called a:

C. start-up

Risks

The parts of a business or business plan that expose the firm to any kind of loss—profits, sales, reputation, assets, customers, and so on.

Competitor

any other business I the same industry as yours.

Intangibles

assets, such as patents or trade-marks, and liabilities, such as accounts payable that have no physical existence.

. 2. Growth/Boom stage

customer purchases increase at a dramatic rate; or by a very rapid increase in sales in a short period of time.

3. Shake-out

following a boom in which there is a rapid decrease in the number of firms in an industry.

Gross profit

funds left over after deducting the cost of goods sold.

Goal

intended outcome for your business

Increasing the Odds of Start up Success

1. Start the business in an incubator 2. Take part in a mentoring program 3. Have a detailed start-up budget 4. Produce a product or service for which there is a proven demand 5. Secure outside investment

Steps of Strategic Planning:

1. The major goals you set for your firm. 2. The types of customers you seek and what benefits you plan to offer them. 3. The stage and trend of your chosen industry. 4. The specific generic and supra strategies you choose to pursue.

Niche market

a narrowly defined segment of the population that is likely to share interest or concerns.

Cash Flows

actual receipt and spending of cash by a business.

Franchise:

agreement that allows a business to be operated using the name and business procedures of another firm.

• Differentiation strategy

aimed at clarifying how one product is unlike another in a mass market.

• Cost strategy

aimed at mas markets in which a firm offers a combination of cost benefits that appeals to the customer.

Profit before taxes

amount of profit earned before calculating the amount of income tax owed.

Entry wedge

an opportunity that makes it possible for a new business to gain a foothold in a market.

Innovative strategy

an overall strategic approach in which a firm seeks to do something that is very different from what others in the industry are doing.

Imitative strategy

an overall strategic approach in which the entrepreneur does more or less what others are already doing.

Market

the business term for population of customers for your product or service.

• Generic strategies

three classic strategies for businesses of all types- differentiation, cost, and focus.

New entrant business

A firm whose product or service is established elsewhere, but is new to this market.

Executive summary

A one- to two-page (250-500 words) overview of the business, its business model, market, expectations, and immediate goals. Typically put at the start of a business plan and is the most popular summary form for a business plan.

Vision statement

A very simple 5-10 word sentence or tagline that expresses the fundamental idea or goal of the firm.

Operational plan

Business plans designed to be used internally for management purposes.

The Elevator Pitch

A 30-second action-oriented description of a business designed to sell the idea of the business to another Leads with the hook, follows up with purpose of the service, ends with where business is now

Invention plan

A business plan that provides information to potential licensees. focuses on the details of an invention, including intellectual property rights.

Order of Steps after Business is acquired:

1. Interview the sellers of the business 2. Study financial reports and other records of the business 3. Personally examine the site of the business 4. Interview customers and suppliers of the business 5. Develop a detailed business plan for the acquisition 6. Negotiate an appropriate price for the business based on its projections 7. Obtain sufficient capital to obtain and operate the business

Five Aspects of your Industry:

1. Rivals 2. Entrants 3. Substitutes 4. Suppliers 5. Customers

8. Which of the following is most likely to be an advantage of a start-up?

A. It begins with a clean slate.

6. Which one of the following is the top reason why small businesses fail?

A. Lack of experience

10. In the in-class example of the Subway for sell, what was the reported cash flow?

B. $106,541

6. Which of the following is the life cycle stage in which customer purchases can increase at a dramatic pace.

B. Growth

8. The stage in which the number of firms in an industry more or less meet customer demand is known as which stage?

B. Growth

9. Which of the following is most likely to be an advantage of buying an existing business?

B. Purchasing a business often requires less cash outlay than for creating a start-up.

9. Which of the following is not an element of an industry analysis?

D. All of the above are part of an industry analysis

10. To adequately specify how profits are made in an industry analysis, the following questions must be answered, except:

D. How can operating expenses be kept above industry averages?

1. A start-up always immediately provides positive cash flows.

F

3. A "shake-out" is a period of time in which an industry experiences extremely rapid growth.

F

Due Diligence

process of investigating a business to determine its value.

1. Introduction stage

product or service is being invented and initially developed

Business plan

A document designed to detail the major characteristics of a firm— its product or service, its industry, its market, its manner of operating (production, marketing, management), and its financial outcomes with an emphasis on the firm's present and future.

5 Paths to Business Ownership:

1. You may start a new business 2. Buy an existing business 3. Franchise a business 4. Inherit a business 5. May be hired to be the professional manager of a small business

7. Which of the following is the life cycle stage marked by a stabilization of demand, with firms in the industry moving to stabilize or improve profits through cost strategies?

C. Maturity

5. 50 percent of new small businesses survive for 10 years.

F

5. The amount of money left after operating expenses are deducted is known as the profit before taxes.

F

1. Industry Analysis is a research process that provides the entrepreneur with key information about the industry, its current situation and trends.

T

2. Franchising a new business is one of the ways to business ownership.

T

2. The changes in competitors, sales and profits in an industry is referred to as industry dynamics.

T

Scope

a characteristic of a market that defines geographic range covered by the market- from local to global.

Scale

a characteristic of a market that describes the size of the market- a mass market or niche market.

Synergy

a combination in which the whole is greater than the sum of its component parts.

Mass market

a customer group that involves large portions of population.

Industry Dynamics

changes in competitors, sales and profits in an industry over time

Strategic actions

competitive responses requiring a major commitment of resources.

Tactical actions

competitive responses with low resource requirements

Revolving Credit

credit agreement that allows borrower to pay all or part of the balance at any time; as the loan balance is paid off, it becomes available to be borrowed again.

5. Decline

sales and profits in the industry begin a falling trend.

Asset

something the business owns that is expected to have economic value in the future

4. Maturity

stabilization of demand, with firms in the industry moving to stabilize or improve profits through cost strategies.

• Focus strategy

targets a portion of the market, called a segment or a niche.

Net profit

the amount of money left after operating expenses are deducted from the business.

Industry

the general name for the line of product or service being sold, or the firms in that line of business.

Post Start-up Tactics

the goal after the start-up stage is to maximize profits by securing a competitive advantage and looking for competitive threats.

• To cope with these competitive pressures

undertake a combination of strategic and tactical actions.

Proof-of-concept Web site

An Internet-based type of business plan providing information or demonstration of a product or service designed to solicit information on customer interest.

Informational plans

Give potential customers or suppliers information about the company and its product or service.

Preselling

Involves introducing your product to potential customers and taking orders for later delivery.

Tagline

Memorable catchphrase that captures the key idea of a business, its service, product, or customer. also known as a slogan

Risks in a Plan

Overstated numbers Numbers that are wrong Inadequate cushion Inadequate payback Narrative and financials do not fit No direct customer connection The Most Common Critical Uncertain sales Overlooked competition Experience deficits "What" problems Deadly aggravations Presenting Your Plan

Key employee/partner plan

Provides information on the company, product/service, market, and critical risks to prospective business or marketing partners or to prospective key employees.

External legitimacy

The extent to which a small business is taken for granted, accepted, or treated as viable by organizations or people outside the small business or the owner's family.

Research and development

The part of a business that is focused on creating new products or services and preparing new technologies, ideas, products, or services for the firm's market.

The Classic Business Plan

Title Page Company name Contact information Date this version of the plan was completed Proprietary statement to protect your ideas

Internal understanding

extent to which employees, investors, and family members in the business know the business's purposes and operations Starting Small and Building Up

Screening plan

gives the basic overview of the firm and a detailed look at the financials. Also called a mini-plan

Industry

tells the reader about the other firms producing this product or service—the competition. goal is to position your firm so that it looks like a potentially solid competitor in an industry with potential.

Types of Franchise (Advantages):

1. Trade name franchising: an agreement that provides to the franchisee only the rights to use the franchisor's name and/or trademark. 2. Product distribution franchise: an agreement that provides specific brand name products which are resold by the franchisee in a specific territory. 3. Conversion franchising: an agreement that provides an organization through which independent businesses may combine resources. 4. Business format franchising: an agreement that provides a complete business format, including trade name, operational procedures, marketing, and products or services to sell.

3. A start-up business has no initial name recognition.

T

4. Data on the profitability of businesses in an industry can be found in reports provided by the Risk Management Association (RMA).

T

4. One of the disadvantages of owning a franchise is that the owner gives up control of marketing and operations

T

Value benefits

displays characteristics related to the nature of the product or service itself.

6. Death/ Retrenchment

established firms must find new approaches to improve the business and its chances for survival.

Cost benefits

refer to the ways by which a firm can keep cost low for customers

Industry Analysis (AI)

research process that provides the entrepreneur with key information about the industry, such as its current situation and trends.

Magic number

the post-tax income the entrepreneur personally seeks from the business.

Legal Considerations (Disadvantages):

• "Franchise disclosure document" • If / how transfer franchise license to someone else • How you may terminate control • What disclosures you are required to make

Advantages of Startups

• Begin with a clean slate • Can use most recent technology • Can be kept small deliberately to limit the magnitude of possible losses • Can provide new products and services

Customers and benefits (2nd step of planning):

• Corporate customers: selling to other businesses may produce greater profits. • Loyal customers: customers return and are already presold. They also refer friends, another source of revenue. • Passionate customers: people who are not just loyal but are likely to rave about your business are likely to generate more potential customers than any other type.

Disadvantages of Buying an Existing Business:

• Difficult to find a successful business appropriate for your experience, skills, and education. • Difficult to determine what a small business is worth. • The reputation of the business may be a hindrance to future success. • Business may be declining because of changes in technology. • Facilities and equipment may be obsolete or in need of major repair.

Determining the Value of a Business:

• Discounted cash flows: cash flows that have been reduced in value because they are to be received in the future. • Discounted cash flow methodology • Asset valuation methodology • Book value: difference between original acquisition cost and the amount of accumulated depreciation. • Net realizable value: the amount for which an asset will sell, less the cost of selling. • Replacement value: the cost to acquire an essentially identical asset. • Comparable sales • Financial ratios • Earnings Multiple: the ratio of the value of a firm to its annual earnings.

Strategic Actions Include:

• Entering new markets • New product introductions • Changing production capacity • Managers/Alliances

Advantages of Buying an Existing Business:

• Established customers provide immediate sales and cash inflows. • Business processes are already in place in an existing, operating business. • Purchasing a business often requires less cash outlay than a start up.

Disadvantages of Start ups

• No initial name recognition • Start up will require significant time to become established • Can be difficult to finance • Cannot easily gain revolving credit • May not have experienced managers and workers

. Tactical Actions Include

• Price cutting (or increases) • Product/Service enhancements • Increased marketing efforts • New distribution channels

Common Types of Entry Wedges:

• Supply shortages • Unutilized resources • Customer contracting • Second sourcing • Market replenishment • Favored purchasing • Government rules