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Business plan preparation consists of several interrelated phases:

● Thorough analysis of the company features, of the market(s) it competes in, of its positioning within such market(s), and of the past performance achieved

● Definition of the precise competitive strategies that the management is expected to pursue the future

● Definition of the actions that need to be implemented to pursue those competitive strategies

● Definition of the quantitative assumptions underpinning the forecast income statement, balance sheet, and cash flow statement

● Preparation of the forecast income statement, balance sheet, and cash flow statement

2.2.1 Markets, Competitive Positioning, and Past Results

In order to prepare accurate and reliable forecasts, it is necessary to deeply understand and analyze the markets the company is operating in.

The articulation and the complexity of the analysis to be carried out are a function of several variables, including the number of business segments the company operates. The following cases are indeed possible:

● The company operates in unrelated businesses (e.g., the case of the so called “holding companies”);

● The company operates in different geographical markets. In case such markets differ because of nature and intensity of the competition, it is advisable to carry out in depth analyses for each of them.

● The business unit(s) targets different distribution channels (e.g., the company sells its products through both its proprietary website and a network of retail stores)

● Hybrid situations that mix the cases above.

2.2.2 Definition of the Competitive Strategies

The definition of the competitive strategies expected to implemented by the company over the business plan horizon is certainly a key aspect.

If the company operates in different sectors, the competitive strategies should be prepared both at the overall company level and at any single business unit level.

Competitive Strategies at Company Level

The definition of competitive strategies at the company level should include the following aspects:

● The sectors in which the company is expected to operate in. This element impacts on:

● Shutting down or divesting business units

● Planning the entry in new segments/sectors (if appropriate via extraordinary corporate transactions such as M&A or joint ventures)

● The legal structure to adopt. Some possible choices are:

● Comprehensive unique legal entity embedding all the operations regardless of the nature of the businesses

● Creation of a holding with coordination and headquarters functions; such parent company would own (entirely or partially) subsidiaries running the different business the company operates in

● Mixed structure where the parent company runs some operating activities and runs other activities via legally independent subsidiaries and

● The best way to get and structure financing. Companies may decide, for example, to finance their growth by going public listing their shares on a stock exchange, opening their capital and raising primary proceeds that will be invested to carry out the growth plans. In the case of large corporations, there might be an “internal capital market” that provides financing for new business/projects via cash pooling arrangements with the subsidiaries. In general, companies can choose from these alternatives:

● Render the legal subsidiaries financially autonomous from the parent company, with the consequence that each subsidiary is free to arrange and procure autonomous financing on the private and public markets in the way it prefers.

● Manage the raising of financing at holding level, redistributing it through the group entities by means of intragroup loans.

● Use a mix of the two above.

● The tax strategy at corporate level. For instance:

● Assessment of the opportunity to consolidate the fiscal incomes generated by the different legal subsidiaries.

● Definition of the transfer pricing policies (this is the most common choice of multinational corporations).

● The investment and management strategy of the corporate intangible assets. For instance, the intangible assets could be:

● Controlled by the single legal entities that have developed or bought it.

● Concentrated in a unique legal entity created ad-hoc to develop, maintain, and protect the overall company intangible assets stock in the best possible way. The other legal entities of the group can use the intangible assets legally owned by the above entity by means of license agreements.

● The role of the corporate structure.

Exhibit 2.1 shows the structure of Alfa, a company controlling subsidiaries operating in the three following business sectors:

● IT and media solutions: high-tech services for the sharing and broadcasting of events

● Post-production and animation: digital content and graphical effects production for the cinema, television, and media advertising markets

● Events media technology: planning and realization services for arts and exposition events

Exhibit 2.1 Competitive strategy at corporate level

Exhibit 2.1 shows the strategies of Alfa Inc. management for the main businesses of the company.

Competitive Strategies at the Single Business Unit Level

The main competitive strategies that can translated in business plan objectives consist of decisions regarding:

● The geographical markets where to sell company's products.

● The geographical markets to establish directly owned operations versus creating partnerships with independent local players.

● The competitive positioning to follow in the chosen market(s). As such, it is necessary to identify with precision:

● Clients' needs to address

● Type of reference client

● Product/service to be offered

● Price policy

● The distribution channel(s) to use.

● The nature of the business activity the company operates into. In this respect, the management may deem it necessary to implement the following measures:

● Supply chain integration at the top/at the bottom of the chain. In other words, the company could decide to internalize and manage directly some activities or steps previously outsourced to suppliers, distributors, agents, and others.

● Outsource some activities previously internalized in the company processes.

● The places in which to physically operate. Management could take these measures:

● Start delocalization process, with the consequence that a portion of the activities is transferred to other production sites.

● Develop new manufacturing plants/production sites.

● Shut down some previously operating manufacturing plants/production sites.

Exhibits 2.2 and 2.3 show the competitive strategy studied by Alfa management with respect to, in particular, the “IT and media solutions” sector.

Exhibit 2.2 Competitive strategy at the single business activity level (the Alfa case, 1st part)

Exhibit 2.3 Competitive strategy at the single business activity level (the Alfa case, 2nd part)

2.2.3 Definition of the Actions Needed to Implement the Competitive Strategy

Once having defined the competitive strategies both at company and at single business activities level, it is then needed to focus on the actions needed in practice to implement them. For instance, let's hypothesize that the company management has opted to implement an internationalization strategy. In this case, the business plan will very likely envisage the opening of new branches, manufacturing plants, and so on in loco in those markets identified for the expansion. As a second example, let's assume the management has decided, in particular, to implement a cost-cutting program aimed at increasing the company profitability. In this example, the business plan could envisage, inter alia:

● Specific actions aimed at cutting labor costs (personnel cutting, delocalization of the production activity, etc.)

● Outsourcing of specific activities previously handled in-house

● Reengineering of the production process

Each of these actions should be coupled with, at least, the following prescriptions:

● Clear objectives that should be pursued

● Impacts on income statement, balance sheet, and cash flow statement

● Expected realization timing

● The project manager responsible

● The potential problems linked with the implementation

The credibility of a business plan largely depends on how clearly the mapping of the actions to implement is set out from the very outset. Indeed, absent precise indications around the actions needed to implement the decided competitive strategy, the latter is jeopardized.

Exhibit 2.4 has been extrapolated from the business plan of Beta a company operating in the production and commercialization of luxury goods, whose management has decided to undergo an internationalization process. The exhibit shows, in particular, the detailed plan underpinning the opening of the new stores (both direct points of sale and stores in franchise), as hypothesized by the management. The schedule provides for each new store:

Exhibit 2.4 Definition of the necessary actions to implement the strategy (the Beta case)

● The moment when raising of the financing needed for the setup of the new store activities is expected

● The moment when opening to public is expected

2.2.4 The Formulation of the Quantitative Assumptions

The output of the planning activity is represented by the income statement, balance sheet, and cash flow statement forecasts, which synthesize the outcome expected by the implementation of the competitive strategy set up by the company management. Having said this, it is also worth noting that the development of such forecasts is based on a series of quantitative assumptions. The breadth of this in turn depends on the complexity inherent to the company for which the business plan has been prepared. As such, if the company operates in several business activities, the following should be defined:

● Macroeconomic assumptions which have to be formulated by distinguishing the different geographical areas where the company operates, and which concern in particular:

● GDP real growth rates

● Inflation rates

● Exchange rates

● Interest rates

● Assumptions on the business activity, concerning in particular the evolution of:

● Revenues

● Costs

● Working capital

● Capital expenditures

● Assumptions at the corporate level:

● The evolution of the corporate costs structure

● Financial management policy:

● Financing costs

● Raising/reimbursement of financings

● Equity injections

● Dividend distributions

● Fiscal policy

● The management of noncore (surplus assets) corporate activities

It is worth noting that:

● Assumptions shall be coherent with the competitive strategies formulated by the company management, as well as with the actual precise actions envisaged to implement the plan.

● Assumptions shall be coherent among each other. As a consequence, hypotheses on financing costs shall be in line with the forecasts on the interest rates evolution.

● All the assumptions shall be explicitly reported and, if possible, corroborated by independent data and supporting materials.

Exhibit 2.5 shows the business plan of Gamma, a company operating in the advertising industry. It shows the assumptions formulated by the company management around the evolution of its market share with separate estimates for the off-line and on-line distribution channels.

Exhibit 2.5 The definition of the quantitative assumptions (the Gamma case)

2.2.5 Preparation of the Plan Forecasts

The last phase of the planning activity is represented by preparation of the forecasts for the income statement, balance sheet, and cash flow statement, which give a condensed representation of management's expected results on the back of the implementation of the chosen and pursued competitive strategies. When the company operates in multiple sectors of activity, it is necessary to take two steps:

1. Develop the forecasts for the income statement, balance sheet, and cash flow statement for:

● Each business sector in which the company operates

● The corporate headquarters

2. Integrate these prospects so as to give a holistic representation of the results expected.