CHAPTER TWO

BUSINESS PLANNING

12/03/2024 1
Failing to plan is planning to fail. ~ Alan Lakein

12/03/2024 2
2.1. Introduction

•In the previous chapter, we dealt with the concept of Entrepreneurship. This unit
will help you to understand the concept of opportunity identification and
evaluation, business idea development and how to prepare a business plan.

•To start any type of business or expand the existing one needs to work on
opportunity identification and evaluation, business idea development and then
prepare business plan.

•Lack of proper opportunity identification and evaluation, idea development

process and business planning are the most often cited reasons for business failure.
12/03/2024 3
2.2 Opportunity Identification and Evaluation

•Opportunity recognition corresponds to the principal activities that take place

before a business is formed or structured.
•The opportunity identification and evaluation stage can be divided into five
main steps namely;
 getting the idea/scanning the environment,
 identifying the opportunity,
 developing the opportunity,
 evaluating the opportunity and
 evaluating
12/03/2024
the team. 4
1) Scanning the Environment/ Getting the Idea
•While scanning the environment it may be provide you with idea and
business opportunities. Idea is a thought or suggestion about a possible
course of action.
•Whereas, opportunity is a favorable time or set of circumstances for doing
something.
•A business opportunity is a gap left in a market by those who currently
serve it, giving a chance to others to add unrealized value by performing
differently from and better than competitors in order to create new
12/03/2024 5
possibilities.
2) Opportunity Identification
•Opportunity identification is the ability to see, to discover and exploit
opportunities that others miss. It is the process of seeking out better
ways of competing.
•It includes scanning the informational environment, being able to
capture, recognize and make effective use of abstract, implicit and
changing information from the changing external environments.
•In developing countries, problems may be changed to business
opportunities.
12/03/2024 6
3) Opportunity Development
•Opportunity development is the process of combining
resources to pursue a market opportunity identified.
•This involves systematic research to refine the idea to the
most promising high potential opportunity that can be
transformed into marketable items.

12/03/2024 7
4) Opportunity Evaluation
•Opportunity screening and evaluation is perhaps the most critical element of the
entrepreneurial process, as it allows the entrepreneur to assess whether the specific
product or service has the returns needed for the resources required.
•This evaluation process involves looking at the creation and length of the
opportunity, its real and perceived value, its risks and returns, its fit with the personal
skills and goals of the entrepreneur, and its differential advantage in its competitive
environment.

5) Assessment of the Entrepreneurial Team

•Regardless of how right the opportunity may seem to be, it will not make a
successful
12/03/2024
business unless it is developed by a team with strong skills. 8
2.3 Business Idea Development

•A business idea is a short and precise description of the basic operation of an

intended business. There are three types of business ideas. These are;
1. Old Idea– Here an individual copies an existing business idea from
someone/somewhere.
2. Old Idea with Modification– In this case the person accepts an old idea
from someone and then modifies it in some way to fit a potential customer’s
demand.
3. A New Idea– This one involves the invention of something new for the first
time.
12/03/2024 9
2.4 Business Idea Identification

•Your business idea will tell you:

 Which need will your business fulfill for the customers and what
kind of customers will you attract?
 What good or service will your business sell?
 Who will your business sell to?
 How is your business going to sell its goods or services?
 How much will your business depend upon and impact the
environment?
12/03/2024 10
• A good business idea will be compatible with the
sustainable use of natural resources and will respect the
social and natural environment on which it depends.
• All business ideas are not equally worth. Therefore, to
identify promising business idea among others, it is
important to answer the above raised questions.

12/03/2024 11
2.5 Methods for Generating Business Ideas

•Every business idea should be based on knowledge of the market and its
needs. The market refers to people who might want to buy a good or
service; i.e. the customers.
•When generating business ideas, it is best to try to keep your mind open to
everything. Your first goal is to think of as many ideas as possible and
make a list of all the possible business opportunities.
•With a list, you will have more choices! You then can scan the list and nail
down the idea(s) that sound most feasible to you and that you think will be
most profitable.
12/03/2024 12
•There are many ways to come up with business ideas, such as surveying local businesses
or asking existing business owners.
•The information gained from one approach may supplement another and help you to
clearly describe your business ideas. Below, we will examine a few different approaches to
generating business ideas.
1. Learn from successful business owners- You should try to get the following
information from them;
 What kind of idea did these businesses start with?
 Where did the ideas come from?
 How did they develop their ideas into successful businesses?
 How does the business profit and fit into the local environment?
12/03/2024 13

2. Draw From Experience

[Link] own Experience

•Look at the list of your interests, your experiences and your
networks. Start with yourself.
What has your experience been as a customer in the market place?
Have you ever searched all day for some items that you could not
find in any store in your area?
•Think about the goods and services you have wanted at different
12/03/2024 14
times and that you have had difficulty finding.
 2. Other People’s Experience
•The people around you are potential customers. Ask your
family and friends about the things they would like to find that
are not locally available.
•Expand your social knowledge by talking to people from
different age groups, social classes, etc…
•You can also visit community groups, colleges, etc. for a
greater understanding of the market.
12/03/2024 15
•Here are some examples of comments that would help with your search for a
business idea:
 “I cannot find a lunch box that keeps the food warm.”
 “The choice of cooking pots in the shops is very limited.”
 “There is no reliable way of sending gift packages to my friends and relatives living
in the villages.”
 “There is not enough entertainment in this town and the weekends are so boring.”
 “I really need to buy some marketing textbooks, but there are no good bookstores
in this town.”
 “There is so much garbage on the streets. Somebody should do something about it.”
12/03/2024 16
3. Survey Your Local Business Area
•Another way of discovering business ideas is to look around
your local community.
•Find out what type of businesses are already operating in
your area and see if you can identify any gaps in the market.
•Visit the closest industrial area, markets and shopping centers
in your area.
12/03/2024 17
4. Scanning Your Environment
•You can use your creativity to find more business ideas in your area. Look at the
list of existing local businesses. It may be useful to think about business ideas by
considering all the resources and institutions in your area. For example think about:
 Natural resources,
 Characteristics and skills of people in the local community,
 Import substitution,
 Waste products,
 Publications,
 Trade fairs and exhibitions,
12/03/2024 18
5. Brainstorming
•Brainstorming means opening up your mind and thinking about
many different ideas.
•You start with a word or a topic and then write down everything that
comes to mind relating to that subject.
•Good ideas can come from concepts that initially seem strange.
Brainstorming works best in a group.

12/03/2024 19
6. Structured Brainstorming
•Structured brainstorming is when you think of the different processes that are
involved in the operation of a particular business and the goods/services that can be
offered with respect to those processes.
•Try to think of all the businesses that are related to different aspects of a product:
 Those involved in production,
 Those involved in the selling process,
 Those involved in recycling or re-using materials,
 Those indirectly related (spin-offs),
 Those involved in servicing,
12/03/2024 20
7. Focus Group
•Focus group is a group of individuals providing information
on a structured format which is led by moderators.
•It is characterized by an open and in depth discussion: rather
than simply asking questions to solicit student response.

12/03/2024 21
8. Problem Inventory Analysis- The difference is rather than generating new idea
themselves, consumers are provided with a list of problems in general product
category. It is a method of obtaining “New Idea” and solutions by focusing on
problems.
9. Free Association- This technique is particularly helpful in developing an entirely
new slant to a problem.
10. Forced Relationships- It is a technique that asks questions about objects or ideas
in an effort to develop a new idea.
11. Attribute Listing- Through this process, originally unrelated objects can be
brought together to form a new combination and possibly a new product/service that
better satisfies a need.
12/03/2024 22
2.6. Business Idea Screening
•Idea screening is the process to spot good ideas and eliminate poor one. To screen the business
idea generated, three approaches are discussed as follow;
1) Macro screening: is aimed screening down ideas to 10. And the common criteria are:
 Are my own competencies (see strength detector) sufficient?
 Can I finance it to a large extent with my own equity?
 Will people buy my product/service (i.e. is it needed and can people afford it)?
2) Micro Screening: is aimed screening down ideas into 3. The common criteria used for
screening are:
 Solvent demand
 Availability of raw materials
 Availability of personal skills
12/03/2024 23

3) Scoring the Suitability of Business Idea:

•This approach is most appropriate when deciding on starting a business.

•When there are more than one possible business ideas and one needs to
decide which one to follow, we use score business ideas (e.g., BI1, BI2,
BI3) by assigning a rating from 1 to 3 for each question, with 3 being the
strongest.
•After we score the ideas we sum the total and select the idea with the
highest score.
12/03/2024 24
12/03/2024 25
•Notes: while to answer the above listed questions it is important to conduct
survey. Collecting information on your business idea gives you an opportunity to
promote your business idea and to present yourself as a potential entrepreneur.
•While to answer the above questions, there are four important groups that you
should talk to:
 Potential customers
 Competitors, suppliers and entities with financial resources
 Financial institutions
 Key informants and opinion leaders
12/03/2024 26
2.7. Concept of Business Plan

•Planning is the first and the most crucial step for starting a
business.
•A carefully charted and meticulously designed business plan
can convert a simple idea/innovation into a successful business
venture.
•A business plan is a road map for starting and running a business.

12/03/2024 27
• A well-crafted business plan identifies opportunities, scans the external and
internal environment to assess the feasibility of business and allocates
resources in the best possible way, which finally leads to the success of the
plan.

• It provides information to all concerned people like the venture capitalist

and other financial institutions, investors, & employees.

• It provides information about the various functional requirements

(marketing, finance, operations and human resources) for running a
business.
12/03/2024 28
• A business plan is the blueprint of the step-by-step procedure that
would be followed to convert a business idea into a successful
business venture.
• A business plan first of all identifies an innovative idea, researches the
external environment to list the opportunities and threats, identifies
internal strengths and weakness, assesses the feasibility of the idea
• and then allocates resources (production/operation, finance, human
resources) in the best possible manner to make the plan successful:
12/03/2024 29
•The objectives of a business plan are to:
 Give directions to the vision formulated by entrepreneur.
 Objectively evaluate the prospects of business.
 Monitor the progress after implementing the plan.
 Persuade others to join the business.
 Seek loans from financial institutions.
 Visualize the concept in terms of market availability,
organizational, operational and financial feasibility.
12/03/2024 30
 Guide the entrepreneur in the actual implementation of the plan.
 Identify the strengths and weakness of the plan.
 Identify challenges in terms of opportunities and threats
 Clarify ideas and identify gaps in management information about
their business, competitors and the market.
 Identify the resources that would be required to implement the plan.
 Document ownership arrangements, future prospects and projected
growths of the business venture.
12/03/2024 31
2.8. Developing a Business Plan

•2.8.1 Business Planning Process

•A plan, which looks very feasible at the first instance, might actually not be when the
details are drawn. Hence documenting the business plan is one of the early steps that an
entrepreneur should take.
•As discussed above, the successful entrepreneur lays down a step-by-step plan that s/he
follows in starting a new business.
•This business plan acts as a guiding tool to the entrepreneur and is dynamic in nature it
needs continuous review and updating so that the plan remains viable even in changing
business situations.
•The12/03/2024
various steps involved in business planning process are discussed here below:32
1) Preliminary Investigation
•Before preparing the plan entrepreneur should:
 Review available business plans (if any).
 Draw key business assumptions on which the plans will be based (e.g.
inflation, exchange rates, market growth, competitive pressures, etc.).
 Scan the external environment and internal environment to assess the
strengths, weakness, opportunities and threats.
 Seek professional advice from a friend/relative or a person who is already
into similar business (if any).
12/03/2024 33
2). Opportunity Identification and Idea Generation
•Entrepreneurship is not just limited to innovation (generation of an
entirely new concept, product or service, but it also encompasses
incremental value addition to the concept (product), services offered
to the consumer, shareholder and employee).
•Opportunity identification and business idea generation is the first
stage of business planning process. It involves generation of new
concepts, ideas, products or services to satisfy demand.
12/03/2024 34
3). Environmental Scanning
•Once a promising idea emerges through idea generation phase the next step is
environmental scanning, which is carried out to analyze the prospective
strengths, weakness, opportunities and threats of the business enterprise.
•Hence before getting into the finer details of setting up business it is advisable
to scan the environment both external and internal and collect the information
about the possible opportunities, threats from the external environment and
strengths and weaknesses from the internal environment (the detail has been
addressed in chapter one).

12/03/2024 35
4) Feasibility Analysis
•Feasibility study is done to find whether the proposed project (considering
the above environmental scanning) would be feasible or not.
•It is important to demarcate environmental scanning and feasibility study at
this point.
•Environmental scanning is carried out to assess the external and internal
environment of the geographical area/areas where, entrepreneur intends to set
up his/her business enterprise,
•whereas feasibility study is carried out to assess the feasibility of the project
itself in a particular environment in greater detail.
12/03/2024 36
5) Report Preparation
•After environmental scanning and feasibility analysis, a business
plan report is prepared.
•It is a written document that describes step-by-step, the strategies
involved in starting and running a business.

12/03/2024 37
2.8.2. Essential Components of Business Plan

I) Cover Sheet: Cover sheet is like the cover page of the book. It mentions the name of the
project, address of the headquarters (if any) and name and address of the promoters.
II) Executive Summary: Executive summary is the first impression about the business
proposal. As the saying goes, the first impression is the last impression. A careful
presentation of information should be done to attract the attention of the evaluators. It
should be in brief (not more than two or three pages) yet it should have all the factual
details about the project that can improve its marketability. It should briefly describe the
company; mention some financial figures and some salient features of the project.
Generating interest in the minds of the readers is the prime motive of the executive
summary.
12/03/2024 38
III) The Business: This will give details about the business
concept.
It will discuss the objective of the business, a brief history about
the past performance of the company (if it is an old company),
what would be the form of ownership (whether it would be a
single proprietor, partnership, cooperative society or a company
under company law).
It would also label the address of the proposed headquarters.
12/03/2024 39
• IV) Funding Requirement: Since the investors and financial institutions
are one of the key bodies examining the business plan report and it is one of
the primary objectives of preparing the business plan report, a careful, well-
planned funding requirement should be documented.

• It is also necessary to project how these requirements would be fulfilled.

• Debt equity ratio should be prepared, which can give an indication about
how much finance would the company require and how it would like to fund
the project.

12/03/2024 40
V) The Product or Services: A brief description of product/services is given in
this subsection. It includes the key features of the product, the product range
that would be provided to the customers and the advantages that the product
holds over and above the similar products/ substitute products available in the
market. It also gives details about the patents, trademarks, copyrights,
franchises, and licensing agreements.
VI) The Plan: Now the functional plans for marketing, finance, human
resources and operations are to be drawn.

12/03/2024 41
1) Marketing Plan: Marketing mix strategies are to be drawn, based on the
market research.
2) Operational Plan: The operational plan would give information about;
(i) Plant location: why was a particular location chosen? Is it in the vicinity of
the market, suppliers, labor or does it have an advantage of government
subsidies for that particular location or are there any other specific reasons for
choosing the particular location?,
(ii) Plan for material requirements, inventory management and quality control are
also drawn for identifying further costs and intricacies of the business.
Finally, the budget for operational plan is also drawn.
12/03/2024 42
3) Organizational Plan: The organizational plan indicates the pattern
of flow of responsibilities and duties amongst people in the
organization, it provides details about the manpower plan that would
be required to put life into the business and
• it would also enlist the details about the laws that would be governed
in managing the employees of the organization.
• In the end the organizational plan is also budgeted.

12/03/2024 43
4) Financial Plan: The financial plan is usually drawn for two to five years for an
existing company.
For a new organization the following projections are drawn:
a) Projected Sales
b) Projected Income and Expenditure Statement
c) Projected Break Even Point
d) Projected Profit and Loss Statement
e) Projected Balance Sheet
f) Projected Cash Flows
g) Projected Funds Flow
h) Projected
12/03/2024 Ratios 44
VII) Critical Risks: The investors are interested in knowing the tentative risks
to evaluate the viability of the business and to measure the risks involved in
the business. This can further give confidence to the investors as they can
calculate the risks involved in the business from their perspectives as well.
VIII) Exit Strategy: The exit strategies would provide details about how the
organization would be dissolved, what would be the share of each stakeholder
in case of winding-up of the organization. It further helps in measuring the
risks involved in investing.
IX) Appendix: The appendix can provide information about the Curriculum
Vitae of the owners, Ownership Agreement and the like.
12/03/2024 45
•Sample Business plan Format
•The business plan outlined below presents all necessary
chapters in detail, including all necessary explanations in the
context of Ethiopia.
• Business plan outline for micro-enterprises - Ethiopian ap
plication Business plan outline 2 for micro and small enter
prises and start [Link]
• Business plan outline 2 for micro and small enterprises an
d start ups Business plan outline For micro and small ente
rprises and start ups
12/03/2024 46
12/03/2024 Business Ethics 47
12/03/2024 Business Ethics 48