Fig 7.3the Lean Model Canvas While the business model canvas and the lean canvas are similar in format, there are differences in how they are used. It is generally accepted that the lean canvas model is a better fit for startups, whereas the business model canvas works well for already established businesses. The lean canvas is simpler; the business model canvas provides a more complete picture of a mature business. Both the business model canvas and the lean canvas are designed for constant iterations, allowing for multiple versions and changes throughout the entrepreneurial process. Part of that process involves customer discovery; thus, the canvases invoke customer-focused design. The target customer is integrated into the canvas from the start through the use of a customer empathy map and a number of design-thinking ideation activities. The customer empathy map is a portrayal of a target customer—the most promising candidate from a business’s customer segments—that explores the understanding of that person’s condition from their perspective to understand his or her problems and needs. Osterwalder and Pigneur used a customer empathy map as part of the design ideation phase of developing a business model canvas. There are differing versions of customer empathy maps, but most seek to answer common questions pertaining to the customer, such as: With whom are we empathizing? What do they need to do? What do they see? What do they say? What do they do? What do they hear? What do they think? Phillips, Proctor & Gamble, Microsoft, and Yeti are examples of well-known companies that make use of customer empathy mapping because, according to the journal Entrepreneur, every transaction can be turned into a meaningful and valuable customer interaction. Once a company analyzes the results of customer mapping exercises, it may very well lead to new products that serve customer needs and/or wants. 101 CU IDOL SELF LEARNING MATERIAL (SLM)
For example, Philips used empathy mapping to detect a high level of fear in young patients immediately before an MRI medical procedure, so it invented a miniature version of the CAT scan equipment used in the procedure called the “kitten scanner” along with toy animal characters that were used to dispel the fear of MRIs among children. Proctor & Gamble created a new advertisement that was released for the 2012 Olympics visualizing the trials and tribulations of mothers raising young athletes, demonstrating Proctor and Gamble’s awareness that some of its customers wanted or needed empathy for the sacrifices they had made to help their children succeed. Likewise, Microsoft has attempted to demonstrate empathy with customers’ privacy concerns by developing an interactive website that explains not only how data is stolen but also how we can better protect our own data. On their company website, the now-famous Yeti cooler company publicly extols the value of empathy mapping, explaining that it leads to better products. Yeti doesn’t just create one on its own, it actually asks its clients to work with the company to create an empathy map.33 Thus, empathy mapping for Yeti is part of its product development process. Customer empathy maps also strive to address customer pains (in this case, fears, frustrations, and anxieties) and gains (wants, needs, hopes, and dreams). Business Model Canvas As Osterwalder and Pigneur describe it, according to Media Innovation and Entrepreneurship, their business model canvas blocks include revenue streams, customer segments, value propositions, cost structures, channels, key activities, key partners, key resources, and customer relationships. Early on, your greatest focus should be on the right side of the canvas because: These are, in many ways, the most critical aspects of starting a new venture (customer segments, value propositions, channels, and revenue streams). The most fluid (revenue streams, channels, and value propositions will likely differ for the differing customer segments and, as you iterate and adapt throughout the customer discovery process, could likely change). These follow a logical temporal order (there’s no need to focus on the costs of building a company if you won’t have customers). In a follow-up to business model generation, the Strategyzer team created a second canvas, the value proposition canvas: https://www.strategyzer.com/canvas/value-proposition-canvas. The value proposition canvas is a new tool that pulls out the customer segment and value proposition blocks of the business model canvas, and encourages more in-depth exploration of those blocks to achieve a good fit between the two. The value proposition canvas tool looks at customer pains, gains and jobs to be done on the customer side and painkillers, gain creators, and products and services on the value proposition side. 102 CU IDOL SELF LEARNING MATERIAL (SLM)
When you peel away the language used to describe business models, the early startup planning stages come down to a series of questions. When it comes to formulating a business model for a startup concept, another popular framework used in entrepreneurial circles is that of desirability-feasibility-viability. This framework forces the entrepreneur to address broad questions about the startup concept: Desirability: How desirable is the product? Who will use it and why? Feasibility: How feasible is this idea? What are the costs of making it? How practical is the concept? Viability: Will this idea remain viable? How will it make money? How will it be sustained over time? These questions then begin to connect to form a narrative about where the startup concept came from, whom it serves, why it’s needed, how it will make money, and how it will be sustained in the future. Fig 7.4Customer Value Proposition diagram The value propositions, customer relationships, customer segments, and channels address the assumptions that will create customer value (desirability). The cost structure and revenue stream blocks are aimed at viability, or overcoming flawed business models. The key partners, key activities, and key resources are about execution and address feasibility. The risk of poor execution can undermine your assumptions that you chose the right infrastructure to execute your business model (feasibility). The risk of solving an irrelevant customer job (sometimes derisively labeled “a solution in search of a problem”) undercuts desirability in your business. The risk of a flawed business model would hamper the financial assumption 103 CU IDOL SELF LEARNING MATERIAL (SLM)
that your business will earn more money than you spend (viability). Adaptability is about the assumption that you chose the right business model within the context of external factors such as technology change, competition, and regulation. The business model canvas is not an exhaustive planning tool by any means.37,38 The risk of such external threats is not specifically addressed on the canvas blocks. The external threats not specifically covered by the canvas blocks can be designed for adaptability, that is, the business model canvas is a necessary but insufficient component of determining the viability of the business idea/concept. There are many elements not included in the canvas that entrepreneurs must address. Industry analysis, including a competitive analysis, for example, falls “off canvas” but is important nonetheless. The Lean Model Canvas The lean model canvas is Ash Maurya’s adaptation of the original business model canvas. As we noted earlier, gone are the customer relationships, key activities, key partners, and key resources blocks. Instead, a problem block is added, because as Maurya explains, “Most startups fail, not because they fail to build what they set out to build, but because they waste time, money and effort building the wrong product. I attribute a significant contributor to this failure to a lack of proper ‘problem understanding’ from the start.” Maurya next added a solution block to the lean model canvas, which corresponds well with features on a minimum viable product (MVP), which you will recall was covered in depth in Launch for Growth to Success. The lean model canvas also adds an “Unfair Advantage” block, similar to the block for competitive advantages or barriers to entry found in a business plan. 7.4 CONDUCTING A FEASIBILITY ANALYSIS As the name suggests, a feasibility analysis is designed to assess whether your entrepreneurial endeavor is, in fact, feasible or possible. By evaluating your management team, assessing the market for your concept, estimating financial viability, and identifying potential pitfalls, you can make an informed choice about the achievability of your entrepreneurial endeavor. A feasibility analysis is largely numbers driven and can be far more in depth than a business plan (discussed in The Business Plan). It ultimately tests the viability of an idea, a project, or a new business. A feasibility study may become the basis for the business plan, which outlines the action steps necessary to take a proposal from ideation to realization. A feasibility study allows a business to address where and how it will operate, its competition, possible hurdles, and the funding needed to begin. The business plan then provides a framework that sets out a map for following through and executing on the entrepreneurial vision. Organizational Feasibility Analysis Organizational feasibility aims to assess the prowess of management and sufficiency of resources to bring a product or idea to market. The company should evaluate the ability of its 104 CU IDOL SELF LEARNING MATERIAL (SLM)
management team on areas of interest and execution. Typical measures of management prowess include assessing the founders’ passion for the business idea along with industry expertise, educational background, and professional experience. Founders should be honest in their self-assessment of ranking these areas. Fig 7.5Feasibility Analysis diagram Resource sufficiency pertains to nonfinancial resources that the venture will need to move forward successfully and aims to assess whether an entrepreneur has a sufficient amount of such resources. The organization should critically rank its abilities in six to twelve types of such critical nonfinancial resources, such as availability of office space, quality of the labor pool, possibility of obtaining intellectual property protections (if applicable), willingness of high-quality employees to join the company, and likelihood of forming favorable strategic partnerships. If the analysis reveals that critical resources are lacking, the venture may not be possible as currently planned. Financial Feasibility Analysis A financial analysis seeks to project revenue and expenses (forecasts come later in the full business plan); project a financial narrative; and estimate project costs, valuations, and cash flow projections. The financial analysis may typically include these items: 105 CU IDOL SELF LEARNING MATERIAL (SLM)
A twelve-month profit and loss projection A three- or four-year profit-and-loss projection A cash-flow projection A projected balance sheets A breakeven calculation The financial analysis should estimate the sales or revenue that you expect the business to generate. A number of different formulas and methods are available for calculating sales estimates. You can use industry or association data to estimate the sales of your potential new business. You can search for similar businesses in similar locations to gauge how your business might perform compared with similar performances by competitors. One commonly used equation for a sales model multiplies the number of target customers by the average revenue per customer to establish a sales projection: T×A=ST×A=S Target(Ed) Customers/Users ×Average Revenue per Customer=Sales Projection Target(Ed) Customers/Users×Average Revenue per Customer=Sales Projection Projected cash flow outlines preliminary expenses, operating expenses, and reserves—in essence, how much you need before starting your company. You want to determine when you expect to receive cash and when you have to write a check for expenses. Your cash flow is designed to show if your working capital is adequate. A balance sheet shows assets and liabilities, necessary for reporting and financial management. When liabilities are subtracted from assets, the remainder is owners’ equity. The financial concepts and statements introduced here are discussed fully in Entrepreneurial Finance and Accounting. Market Feasibility Analysis A market analysis enables you to define competitors and quantify target customers and/or users in the market within your chosen industry by analyzing the overall interest in the product or service within the industry by its target market. You can define a market in terms of size, structure, growth prospects, trends, and sales potential. This information allows you to better position your company in competing for market share. After you’ve determined the overall size of the market, you can define your target market, which leads to a total available market (TAM), that is, the number of potential users within your business’s sphere of influence. This market can be segmented by geography, customer attributes, or product- oriented segments. From the TAM, you can further distill the portion of that target market that will be attracted to your business. This market segment is known as a serviceable available market (SAM) Applying Feasibility Outcomes After conducting a feasibility analysis, you must determine whether to proceed with the venture. One technique that is commonly used in project management is known as a go-or- 106 CU IDOL SELF LEARNING MATERIAL (SLM)
no-go decision. This tool allows a team to decide if criteria have been met to move forward on a project. Criteria on which to base a decision are established and tracked over time. You can develop criteria for each section of the feasibility analysis to determine whether to proceed and evaluate those criteria as either “go” or “no go,” using that assessment to make a final determination of the overall concept feasibility. Determine whether you are comfortable proceeding with the present management team, whether you can “go” forward with existing nonfinancial resources, whether the projected financial outlook is worth proceeding, and make a determination on the market and industry. If satisfied that enough “go” criteria are met, you would likely then proceed to developing your strategy in the form of a business plan. 7.5 THE BUSINESS PLAN Unlike the brief or lean formats introduced so far, the business plan is a formal document used for the long-range planning of a company’s operation. It typically includes background information, financial information, and a summary of the business. Investors nearly always request a formal business plan because it is an integral part of their evaluation of whether to invest in a company. Although nothing in business is permanent, a business plan typically has components that are more “set in stone” than a business model canvas, which is more commonly used as a first step in the planning process and throughout the early stages of a nascent business. A business plan is likely to describe the business and industry, market strategies, sales potential, and competitive analysis, as well as the company’s long-term goals and objectives. An in-depth formal business plan would follow at later stages after various iterations to business model canvases. The business plan usually projects financial data over a three-year period and is typically required by banks or other investors to secure funding. The business plan is a roadmap for the company to follow over multiple years. Some entrepreneurs prefer to use the canvas process instead of the business plan, whereas others use a shorter version of the business plan, submitting it to investors after several iterations. There are also entrepreneurs who use the business plan earlier in the entrepreneurial process, either preceding or concurrently with a canvas. For instance, Chris Guillebeau has a one-page business plan template in his book the $100 Startup. His version is basically an extension of a napkin sketch (see the “Are You Ready?” activity in Designing the Business Model), without the detail of a full business plan. As you progress, you can also consider a brief business plan (about two pages)—if you want to support a rapid business launch—and/or a standard business plan. As with many aspects of entrepreneurship, there are no clear hard and fast rules to achieving entrepreneurial success. You may encounter different people who want different things (canvas, summary, full business plan), and you also have flexibility in following whatever tool works best for you. Like the canvas, the various versions of the business plan are tools that will aid you in your entrepreneurial endeavor. 107 CU IDOL SELF LEARNING MATERIAL (SLM)
Business Plan Overview Most business plans have several distinct sections. The business plan can range from a few pages to twenty-five pages or more, depending on the purpose and the intended audience. For our discussion, we’ll describe a brief business plan and a standard business plan. If you are able to successfully design a business model canvas, then you will have the structure for developing a clear business plan that you can submit for financial consideration. Fig 7.6Types of Business Plans Both types of business plans aim at providing a picture and roadmap to follow from conception to creation. If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept. The full business plan is aimed at executing the vision concept, dealing with the proverbial devil in the details. Developing a full business plan will assist those of you who need a more detailed and structured roadmap, or those of you with little to no background in business. The business planning process includes the business model, a feasibility analysis, and a full business plan, which we will discuss later in this section. Next, we explore how a business plan can meet several different needs. Purposes of a Business Plan A business plan can serve many different purposes—some internal, others external. As we discussed previously, you can use a business plan as an internal early planning device, an extension of a napkin sketch, and as a follow-up to one of the canvas tools. A business plan can be an organizational roadmap, that is, an internal planning tool and working plan that you can apply to your business in order to reach your desired goals over the course of several years. The business plan should be written by the owners of the venture, since it forces a 108 CU IDOL SELF LEARNING MATERIAL (SLM)
firsthand examination of the business operations and allows them to focus on areas that need improvement. Refer to the business venture throughout the document. Generally speaking, a business plan should not be written in the first person. A major external purpose for the business plan is as an investment tool that outlines financial projections, becoming a document designed to attract investors. In many instances, a business plan can complement a formal investor’s pitch. In this context, the business plan is a presentation plan, intended for an outside audience that may or may not be familiar with your industry, your business, and your competitors. You can also use your business plan as a contingency plan by outlining some “what-if” scenarios and exploring how you might respond if these scenarios unfold. Pretty Young Professional launched in November 2010 as an online resource to guide an emerging generation of female leaders. The site focused on recent female college graduates and current students searching for professional roles and those in their first professional roles. It was founded by four friends who were coworkers at the global consultancy firm McKinsey. But after positions and equity were decided among them, fundamental differences of opinion about the direction of the business emerged between two factions, according to the cofounder and former CEO Kathryn Minshew. “I think, naively, we assumed that if we kicked the can down the road on some of those things, we’d be able to sort them out,” Minshew said. Minshew went on to found a different professional site, The Muse, and took much of the editorial team of Pretty Young Professional with her.50 Whereas greater planning potentially could have prevented the early demise of Pretty Young Professional, a change in planning led to overnight success for Joshua Esnard and The Cut Buddy team. Esnard invented and patented the plastic hair template that he was selling online out of his Fort Lauderdale garage while working a full-time job at Broward College and running a side business. Esnard had hundreds of boxes of Cut Buddies sitting in his home when he changed his marketing plan to enlist companies specializing in making videos go viral. It worked so well that a promotional video for the product garnered 8 million views in hours. The Cut Buddy sold over 4,000 products in a few hours when Esnard only had hundreds remaining. Demand greatly exceeded his supply, so Esnard had to scramble to increase manufacturing and offered customers two-for-one deals to make up for delays. This led to selling 55,000 units, generating $700,000 in sales in 2017.51 After appearing on Shark Tank and landing a deal with Daymond John that gave the “shark” a 20-percent equity stake in return for $300,000, The Cut Buddy has added new distribution channels to include retail sales along with online commerce. Changing one aspect of a business plan—the marketing plan—yielded success for The Cut Buddy. If you opt for the brief business plan, you will focus primarily on articulating a big-picture overview of your business concept. This version is used to interest potential investors, 109 CU IDOL SELF LEARNING MATERIAL (SLM)
employees, and other stakeholders, and will include a financial summary “box,” but it must have a disclaimer, and the founder/entrepreneur may need to have the people who receive it sign a nondisclosure agreement (NDA). The full business plan is aimed at executing the vision concept, providing supporting details, and would be required by financial institutions and others as they formally become stakeholders in the venture. Both are aimed at providing a picture and roadmap to go from conception to creation. Types of Business Plans The brief business plan is similar to an extended executive summary from the full business plan. This concise document provides a broad overview of your entrepreneurial concept, your team members, how and why you will execute on your plans, and why you are the ones to do so. You can think of a brief business plan as a scene setter or—since we began this chapter with a film reference—as a trailer to the full movie. The brief business plan is the commercial equivalent to a trailer for Field of Dreams, whereas the full plan is the full-length movie equivalent. Brief Business Plan As the name implies, the executive summary summarizes key elements of the entire business plan, such as the business concept, financial features, and current business position. The executive summary version of the business plan is your opportunity to broadly articulate the overall concept and vision of the company for yourself, for prospective investors, and for current and future employees. A typical executive summary is generally no longer than a page, but because the brief business plan is essentially an extended executive summary, the executive summary section is vital. This is the “ask” to an investor. You should begin by clearly stating what you are asking for in the summary. In the business concept phase, you’ll describe the business, its product, and its markets. Describe the customer segment it serves and why your company will hold a competitive advantage. This section may align roughly with the customer segments and value-proposition segments of a canvas. Next, highlight the important financial features, including sales, profits, cash flows, and return on investment. Like the financial portion of a feasibility analysis, the financial analysis component of a business plan may typically include items like a twelve-month profit and loss projection, a three- or four-year profit and loss projection, a cash-flow projection, a projected balance sheet, and a breakeven calculation. You can explore a feasibility study and financial projections in more depth in the formal business plan. Here, you want to focus on the big picture of your numbers and what they mean. The current business position section can furnish relevant information about you and your team members and the company at large. This is your opportunity to tell the story of how you 110 CU IDOL SELF LEARNING MATERIAL (SLM)
formed the company, to describe its legal status (form of operation), and to list the principal players. In one part of the extended executive summary, you can cover your reasons for starting the business: Here is an opportunity to clearly define the needs you think you can meet and perhaps get into the pains and gains of customers. You also can provide a summary of the overall strategic direction in which you intend to take the company. Describe the company’s mission, vision, goals and objectives, overall business model, and value proposition. Rice University’s Student Business Plan Competition, one of the largest and overall best- regarded graduate school business-plan competitions (see Telling Your Entrepreneurial Story and Pitching the Idea), requires an executive summary of up to five pages to apply. Full Business Plan Even full business plans can vary in length, scale, and scope. Rice University sets a ten-page cap on business plans submitted for the full competition. The IndUS Entrepreneurs, one of the largest global networks of entrepreneurs, also holds business plan competitions for students through its Tie Young Entrepreneurs program. In contrast, business plans submitted for that competition can usually be up to twenty-five pages. These are just two examples. Some components may differ slightly; common elements are typically found in a formal business plan outline. The next section will provide sample components of a full business plan for a fictional business. Executive Summary The executive summary should provide an overview of your business with key points and issues. Because the summary is intended to summarize the entire document, it is most helpful to write this section last, even though it comes first in sequence. The writing in this section should be especially concise. Readers should be able to understand your needs and capabilities at first glance. The section should tell the reader what you want and your “ask” should be explicitly stated in the summary. Describe your business, its product or service, and the intended customers. Explain what will be sold, who it will be sold to, and what competitive advantages the business has. Business Description This section describes the industry, your product, and the business and success factors. It should provide a current outlook as well as future trends and developments. You also should address your company’s mission, vision, goals, and objectives. Summarize your overall strategic direction, your reasons for starting the business, a description of your products and services, your business model, and your company’s value proposition. Consider including the Standard Industrial Classification/North American Industry Classification System (SIC/NAICS) code to specify the industry and insure correct identification. The industry 111 CU IDOL SELF LEARNING MATERIAL (SLM)
extends beyond where the business is located and operates, and should include national and global dynamics. Industry Analysis and Market Strategies Here you should define your market in terms of size, structure, growth prospects, trends, and sales potential. You’ll want to include your TAM and forecast the SAM. (Both these terms are discussed in Conducting a Feasibility Analysis.) This is a place to address market segmentation strategies by geography, customer attributes, or product orientation. Describe your positioning relative to your competitors in terms of pricing, distribution, promotion plan, and sales potential. Competitive Analysis The competitive analysis is a statement of the business strategy as it relates to the competition. You want to be able to identify who are your major competitors and assess what are their market shares, markets served, strategies employed, and expected response to entry? You likely want to conduct a classic SWOT analysis (Strengths Weaknesses Opportunities Threats) and complete a competitive-strength grid or competitive matrix. Outline your company’s competitive strengths relative to those of the competition in regard to product, distribution, pricing, promotion, and advertising. What are your company’s competitive advantages and their likely impacts on its success? The key is to construct it properly for the relevant features/benefits (by weight, according to customers) and how the startup compares to incumbents. The competitive matrix should show clearly how and why the startup has a clear (if not currently measurable) competitive advantage. Some common features in the example include price, benefits, quality, and type of features, locations, and distribution/sales.A competitive analysis helps you create a marketing strategy that will identify assets or skills that your competitors are lacking so you can plan to fill those gaps, giving you a distinct competitive advantage. When creating a competitor analysis, it is important to focus on the key features and elements that matter to customers, rather than focusing too heavily on the entrepreneur’s idea and desires. Fig 7.7Competitive analysis Template 112 CU IDOL SELF LEARNING MATERIAL (SLM)
Operations and Management Plan In this section, outline how you will manage your company. Describe its organizational structure. Here you can address the form of ownership and, if warranted, include an organizational chart/structure. Highlight the backgrounds, experiences, qualifications, areas of expertise, and roles of members of the management team. This is also the place to mention any other stakeholders, such as a board of directors or advisory board(s), and their relevant relationship to the founder, experience and value to help make the venture successful, and professional service firms providing management support, such as accounting services and legal counsel. Marketing Plan Here you should outline and describe an effective overall marketing strategy for your venture, providing details regarding pricing, promotion, advertising, distribution, media usage, public relations, and a digital presence. Fully describe your sales management plan and the composition of your sales force, along with a comprehensive and detailed budget for the marketing plan. Financial Plan A financial plan seeks to forecast revenue and expenses; project a financial narrative; and estimate project costs, valuations, and cash flow projections. This section should present an accurate, realistic, and achievable financial plan for your venture (see Entrepreneurial Finance and Accounting for detailed discussions about conducting these projections). Include sales forecasts and income projections, pro forma financial statements (Building the Entrepreneurial Dream Team, a breakeven analysis, and a capital budget. Identify your possible sources of financing. 7.6 SUMMARY Business models and business plans are tools involved in the strategic process of charting a path for your entrepreneurial venture. When starting a company, it’s best to avoid the Field of Dreams approach of building a business and hoping that customers will just show up. Innovation has been linked to entrepreneurship for at least nine decades. More recent theories suggest that disruptive innovations are disruptive because they disturb the underlying business model of the companies being disrupted. A business model, which is unique to a company, describes the rationale of how an organization creates, delivers, and captures values. A business model canvas is a popular tool used by entrepreneurs and intrapreneurs to map out and plan different components of a business model. 113 CU IDOL SELF LEARNING MATERIAL (SLM)
The business model canvas addresses customer segments, customer relationships, channels (of distribution), revenue streams, value propositions, key partners, key activities, key resources, and cost structure. The lean model canvas and social business model canvas are derivations of the original business model canvas. A feasibility study is a tool in the entrepreneurs’ toolkit that can help determine whether to proceed on a venture early on. A feasibility study is usually more in depth than a business plan and focuses on analysis of real-world numbers and projections. The most common elements of a feasibility study include a market analysis, a financial analysis, and management analysis. The business plan is a formal document used for long-range planning of a company’s operation that typically includes financial information, background information, and a summary of the business. Business plans can be used as internal guiding documents early in the entrepreneurial process. 7.7 KEYWORDS Balance sheet: Financial statement that summarizes a company’s financial condition according to the accounting equation. Breakeven point: Level of operations that results in exactly enough revenue to cover costs. Business model: Plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process. Business model canvas: Developed by Osterwalder and Pigneur, used to develop a business model for a venture, including nine blocks that are mapped out to address customer segments, customer relationships, channels, revenue streams, value propositions, key partners, key activities, key resources, and cost structure. Business model innovation: Occurs when an existing business fundamentally changes their business model. Business plan: Formal document that typically describes the business and industry, market strategies, sales potential, and competitive analysis, as well as the company’s long-term goals and objectives. Competitive matrix: Shows how and why a start-up has a clear if not measurable competitive advantage for relevant features/benefits by weight according to customers, such as price and quality in relation to competitors. Customer empathy map: Portrayal of a target customer, the most promising candidate from a business’ customer segments, which explores the understanding of that person’s condition from their perspective to understand his or her problems and needs. 114 CU IDOL SELF LEARNING MATERIAL (SLM)
Disruptive innovation: Process that significantly impacts the market by making a product or service more affordable and/or accessible often by smaller companies in an industry. Executive summary: Initial section of a business plan document that summarizes the key elements of the entire plan. Feasibility analysis: Feasibility analysis is the process of determining if a business idea is viable; it includes testing the viability of your product or service, evaluating your management team, assessing the market for your concept, and estimating financial viability. Financial analysis: Forecast’s revenue and expenses; projects a financial narrative; and estimates project costs, valuations, and cash flow projections. Fixed costs: Costs that do not change, regardless of the number of sales. Go-or-no-go decision: Determination to proceed with or abandon a plan or project. 7.8 LEARNING ACTIVITIES 1.What unused resources are present in your own life that could be translated into a shared economy idea for a new venture? ---------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ------ 2. In your opinion, what skills does a person need to have to be a successful entrepreneur? ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 7.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are some factors that might indicate it is a good time to start a business? 2. When should an entrepreneur explore opportunities? 3. What should a potential entrepreneur research before starting a business? 4. What is a unique selling proposition? 5. What is a business model? Long Questions 1. What types of businesses fit best with each respective canvas type? 2. What are the advantages of using a canvas to plan your business? 3. How do the arts relate to the business model creation process? 115 CU IDOL SELF LEARNING MATERIAL (SLM)
4. What new patterns or behaviors have you noticed within your society or the country’s society? 5. Why is feasibility analysis important? B. Multiple Choice Questions 1. According to Ash Maurya’s typology, Airbnb is an example of what type of business model? a. Direct b. Multisided c. Open d. Marketplace 2. Which start-up grew from a failed podcasting company called Odeo? a. Instagram b. Twitter c. Stub hub d. Groupon 3. Who is best suited to write a business plan? a. Investor b. Founder(s) c. Consultant d. Chief financial officer 4. What is a change, typically minor, of the current business model in an attempt to capitalize on a closely related market opportunity? a. Innovation b. Disruption c. Iteration d. Increment 5. A tool to identify your idealized target customer and develop a better understanding of his or her environment, behaviour, concerns, and aspirations. a. Jobs to be done b. Business plan c. Business model canvas d. Empathy map 116 CU IDOL SELF LEARNING MATERIAL (SLM)
6. A ________ is a formal document that typically describes the business and industry, market strategies, sales potential, and competitive analysis, as well as the company’s long-term goals and objectives. a. Business plan b. Business model c. Customer empathy map d. Revenue model 7. Select the item that does not belong to the business model canvas. a. Market size b. Revenue streams c. Value proposition d. Customer segments Answers 1-b, 2-a, 3-b, 4-c, 5-a, 6 -c, 7- d 7.10 REFERENCES Textbooks T1 Gupta, R.K. &Lipika, K.L. 2115. Fundamentals of entrepreneurship development & project management, Himalaya Publishing House. ISBN: 978-9351426844. T2 Ivaturi, V.K., Ganesh, M., Mittal, A., Subramanya, S. 2117. The Manual for Indian Start-ups: Tools to Start and Scale-up Your New Venture, Penguin Random House India. ISBN: 978-0143428527. Reference Books • Hisrich, Entrepreneurship, Tata McGraw Hill, New Delhi, 2001. • S.S.Khanka, Entrepreneurial Development, S.Chand and Company Limited, New Delhi, 2001. 117 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT – 8 : FEASIBILITY STUDY – STARTING THE VENTURE – PART III STRUCTURE 8.0 Learning Objectives 8.1 Introduction 8.2 Project Feasibility Study 8.3 Market Analysis 8.4 Financial Analysis 8.5 Technical Analysis 8.6 Economic Analysis 8.7 Summary 8.8 Keywords 8.9 Learning Activity 8.10 Unit End Questions 8.11 References 8.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Conduct a feasibility analysis of the proposed business ideas in regard to Marketability Technical viability and Funding Legalities Prepare a business plan Understand basic start-up problems. 8.1 INTRODUCTION The process of setting up a business is preceded by the decision to choose entrepreneurship as a career and identification of promising business ideas upon a careful examination of the entrepreneurial opportunities. Generation of ideas is not enough; the business ideas must stand the scrutiny from techno-economic, financial and legal perspectives. That is, after the initial screening of the ideas that do not seem promising prima facie, you should conduct an in-depth examination of the chosen three-four before settling for the one where you would like to exert your time, money and energies. You should prepare a business plan that will serve as the road map for effective venturing, whether you may require institutional funding (in which case it is necessary to do so) or not. Setting up of new business enterprises is a very challenging task; you are likely to encounter many problems end route. It’s advisable to be aware of these problems as to forewarn means to fore arm. 1. Feasibility analysis is the process of determining if a business idea is viable. 118 CU IDOL SELF LEARNING MATERIAL (SLM)
2. It is the preliminary evaluation of a business idea, conducted for the purpose of determining whether the idea is worth pursuing. 3. Feasibility analysis takes the guesswork (to a certain degree) out of a business launch and provides an entrepreneur with a more secure notion that a business idea is feasible or viable. Prospectus’ research and writing team is recognized as a world leader in financial feasibility study preparation. Consisting of lifelong entrepreneurs, our team is dedicated to the success of our clients’ goal. We have assisted hundreds of companies in writing their finance and economic feasibility reports and prepared vital studies for a business’s initial launch. From real estate to high tech to economic development to refineries of all kinds, there is not an aspect of the feasibility study process that our staff is not intimately knowledgeable about. The financial aspect of such studies is one of our strengths. A financial feasibility study, or FFS, should assess the viability of a project based on major pivotal component: will the project or business have enough cash to complete the project (and generate a profit). One of the bottom lines of any business is whether a company can sustain itself, pay its employees and of course make a profit. A financial study can help in this assessment. Components to consider include: 1. Company Expenses 2. Revenues. 3. Assets 4. Liabilities 5. Cash flow (money in, and money out). An economic or finance feasibility study is developed for companies that seek to understand the amount of capital they need to procure to successfully start and complete any given project. While a business plan may have a section called the “CBA” or cost-benefit-analysis, in an economic feasibility study it will be greater in detail and have more statistics and numbers in the financials. Importance of a Financial Feasibility Study There are many important factors that any feasibility study should address, and in the financial or economic studies this is equally true. A financial feasibility study can concentrate on a variety of projects or developments or can focus one specific area or study. In any finance study, particularly if one is seeking to raise capital from a bank or private backers, the basic minimum of any financial report (and business plan as well) should be to cover the following: How much capital ones needs to begin the business? How much capital ones needs to operate the business? 119 CU IDOL SELF LEARNING MATERIAL (SLM)
ROI or return on investment, i.e., when will investors see their money back with a return. Why Write a Financial Feasibility Study? Writing a financial feasibility study is good business practice, especially for companies that are planning on raising many millions of dollars and want to have the knowledge readily available to make an educated decision about a project’s viability. It is hard to image a bank or investor infusing capital in a company raising tens of millions of dollars that does not have such a report. By creating such a real estate financial study or for any product study, for example, you will be able to navigate potential pitfalls during development and save needed capital in the process, as well as possibly discover new opportunities in the market. Benefits of Writing a Feasibility Study: Prepares the companies for up-to-date information regarding statistical information on any project, i.e., market for products, real estate development, demographics, income streams, etc. Creates knowledge of how much capital, if any, is needed for the project’s launch and success. Again, this can be for any business, high tech, real estate, oil, energy etc. Helps with strategies. Since the financing needs are known this can help with strategizing next moves or first mover advantage for new areas. Identifies areas for growth. Inspires confidence in the management team since obtaining the numbers can strengthen a business and its leadership belief in the company’s success. Feasibility studies provide intelligence, statistics for the management team. A feasibility study is essentially written prior to a project’s undertaking for a simple reason: Directors of companies and their investors want to ensure that any given project they plan on developing is actually “feasible” and preparing a study showing this feasibility is the main point of writing such a report (which of course will help save needed capital and time in the long run). A feasibility study includes such vital information and data as the funding needs to complete the project, the market opportunity, government regulations, risk factors, strength and weaknesses, the management team and the financials of the company. While a feasibility study somewhat sounds like a business plan, such reports tend to be many times longer with more details on the market and financials. Our team at Prospectus.com has worldwide experience in writing feasibility studies. Here is a partial list of our process. We have used a real estate project as an example. But this can be utilized for product launch, not just for the real estate industry. Some features are missing but the general idea can be conveyed as follows: Review Initial analysis of your project 120 CU IDOL SELF LEARNING MATERIAL (SLM)
Recommendation on next course of action Undertake the project Information assessment and collection Initial analysis of the proposed development area, including the initial demographics Conduct product view or for real estate, land or site review Proposed product costs, or for real estate, construction and development costs. Market analysis Demographic analysis of proposed product or area Product and neighbourhood analysis Demographic comparison Municipal incentives National market overview Analysis of similar products or developments Regional market analysis Competitive market analysis Competitive advantages of project or location Disadvantages of project or location Projected overall market Pricing analysis Purchases or occupancy Interviews if needed Financial analysis Management summary Principals Advisors Third party team, i.e., law firm, accountant etc. Financial Statements and Projections Pro forma Balance sheet Income statement Profit and loss Recommendations We will make recommendations based on our analysis and conclusionsAppendixes and Addendum Once complete we will then send the draft version of the feasibility study for review and comments.Start to Finish 121 CU IDOL SELF LEARNING MATERIAL (SLM)
We work on the project from inception to completion. 8.2 PROJECT FEASIBILITY STUDY Feasibility literally means whether some idea will work or not. It knows beforehand whether there exists a sizeable market for the proposed product/service, what would be the investment requirements and where to get the funding from, whether and wherefrom the necessary technical know-how to convert the idea into a tangible product may be available, and so on. In other words, feasibility study involves an examination of the operations, financial, HR and marketing aspects of a business on ex ante (Before the venture comes into existence) basis. Thus, you may simultaneously read this lesson and the lessons on marketing, finance etc. to have a better idea of the issues involved. What we present hereunder is a brief outline of the issues impinging upon the various aspects of the feasibility of the proposed project. By now, you would have understood that feasibility is a multivariate concept; that is, a project has to be viable not only in technical terms but also in economic and commercial terms too. Moreover, there always is a possibility that a project that is technically possible may not be economically viable. For instance, you can construct a dust free factory in Rajasthan, but it is more economically sensible to do so in Chandigarh/ Bangalore. As even as we take up the various aspects of feasibility one by-one, it must not mislead into believing that there is a sequence and that there are no interdependencies. Examination of the feasibility requires skills that you may fall short of. You may take the help of the Technical Consultancy Organisations (TCOs) such as HARDICON (Haryana-Delhi Industrial Consultancy Organisation) towards this purpose. There are district-wise industrial potential surveys available with the SISIs and DICs that may serve as a good starting point. You may also make use of the Project Reports published by the directorate of industries and private consulting firms. Obviously, as you use these off-the- shelf project reports, you need to re- validate their assumptions and findings and resist the temptation of jump-starting. Whether you use the already published project reports or wish to start afresh, you need to examine all the facets of the feasibility of the proposed project idea, viz., marketing, and technical, financial, economic and legal. 8.3 MARKET ANALYSIS A market, whether a place or not, is the arena for interaction among buyers and sellers. From seller’s point of view, market analysis is primarily concerned with the aggregate demand of the proposed product/service in future and the market share expected to be captured. Success of the proposed project clearly hinges on the continuing support of the customers. However, it is very difficult to identify the market for one’s product/service. After all, the whole universe cannot be your market. You have to carefully segment the market according to some criteria such as geographic scope, demographic and psychological profile of the potential customers etc. It is a study of knowing who all comprise your customers, for this you require 122 CU IDOL SELF LEARNING MATERIAL (SLM)
information on: - Consumption trends. - Past and present supply position - Production possibilities and constraints - Imports and Exports Competition - Cost structure - Elasticity of demand - Consumer behaviour, intentions, motivations, attitudes, preferences and requirements - Distribution channels and marketing policies in use - Administrative, technical and legal constraints impinging on the marketing of the product. 8.4 FINANCIAL ANALYSIS The objective of financial analysis is to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide the capital. While conducting a financial appraisal certain aspect has to be looked into like: Investment outlay and cost of project Means of financing - Projected profitability Break- even point Cash flows of the project Investment worthiness judged in terms of various criteria of merit Projected financial position. 8.5 TECHNICAL ANALYSIS The issues involved in the assessment of technical analysis of the proposed project may be classified into those pertaining to inputs, throughputs and outputs. Input Analysis: Input analysis is mainly concerned with the identification, quantification and evaluation of project inputs, that is, machinery and materials. You have to ensure that the right kind and quality of inputs would be available at the right time and cost throughout the life of the project. You have to enter into long-term contracts with the potential suppliers; in many cases you have to cultivate your supply sources. When Macdonald entered India, they developed sustainable sources of supply of potatoes, lettuce and other ingredients for their burgers. The activities involved in developing and retaining supply sources are referred to as supply chain management. Throughput Analysis: It refers to the production/operations that you would perform on the inputs to add value. Usually, the inputs received would undergo a process of transformation in several stages of manufacture. Where to locate the facility, what would be the sequence, what would be the layout, what would be the quality control measures, etc. are the issues that you would learn in greater details in subsequent lessons. Output Analysis: this involves product specification in terms of physical features- colour, weight, length, breadth, height; functional features; chemical material properties; as well as standards to be complied with such as BIS, ISI, and ISO etc. 123 CU IDOL SELF LEARNING MATERIAL (SLM)
8.6 ECONOMIC ANALYSIS Economics is the study of costs- and- benefits. In regard to the feasibility of the study the entrepreneur is concerned whether the capital cost as well as the cost of the product is justifiable vis-à-vis the price at which it will sell at the market place. For example, technically, silver can be extracted from silver bromide, (a chemical used for processing the X-ray and photo films); but, the cost of extraction is so high that it would not be economically feasible to do so. Likewise, until recently cost of harnessing solar power was prohibitively high. This cost-benefit analysis goes into financial calculations for profitability analysis that we discussed under financial analysis. At this stage it is also useful to distinguish between the economic and commercial feasibility; whereas economic feasibility leads one to the unit cost of the product, commercial feasibility informs whether enough units would sell. Apart from the cost-benefit analysis as above, which we also refer to as private cost benefit analysis, it is also useful to do what is known as social- cost-benefit- analysis (SCBA). For example, the entrepreneur may be getting subsidized electricity in which case private cost would be less than social cost. Likewise, exporting units earn precious foreign exchange resulting into social benefits being more than private earnings. Many a time, a project that is worthy on SCBA may find greater favour with the support agencies. 8.7 SUMMARY In case you decide to set up a small – scale industry, it is desirable that have to initially make The process of setting up a business is preceded by the decision to choose entrepreneurship as a career and identification of promising business ideas upon a careful examination of the entrepreneurial opportunities Prospectus’ research and writing team is recognized as a world leader in financial feasibility study preparation. A financial feasibility study, or FFS, should assess the viability of a project based on major pivotal component A financial feasibility study can concentrate on a variety of projects or developments or can focus one specific area or study Writing a financial feasibility study is good business practice, especially for companies that are planning on raising many millions of dollars and want to have the knowledge readily available to make an educated decision about a project’s viability. A feasibility study includes such vital information and data as the funding needs to complete the project, the market opportunity, government regulations, risk factors, strength and weaknesses, the management team and the financials of the company. 124 CU IDOL SELF LEARNING MATERIAL (SLM)
A market, whether a place or not, is the arena for interaction among buyers and sellers. The objective of financial analysis is to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide the capital. 8.8KEYWORDS Input analysis is mainly concerned with the identification, quantification and evaluation of project inputs, that is, machinery and materials. Throughput Analysis: It refers to the production/operations that you would perform on the inputs to add value. Output Analysis: this involves product specification in terms of physical features- colour, weight, length, breadth, height; functional features; chemical material properties; as well as standards to be complied with such as BIS, ISI, and ISO etc. Economics is the study of costs- and- benefits. In regard to the feasibility of the study the entrepreneur is concerned whether the capital cost as well as the cost of the product is justifiable vis-à-vis the price at which it will sell at the market place. SCBA - SOCIAL- COST-BENEFIT- ANALYSIS (SCBA) 8.9 LEARNING ACTIVITY 1.Start a list of people that you think are entrepreneurs and what special skill do they having in your view behind their success. ---------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- 2.What do you think it means to be an entrepreneur? What do you think are some of the characteristics of an entrepreneur? Make a mind map of your ideas ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 8.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Input analysis? 2. Define Throughput Analysis? 3. DefineOutput Analysis? 125 CU IDOL SELF LEARNING MATERIAL (SLM)
4. DefineEconomics? 5. DefineFeasibility study? Long Questions 1. What are the important facets of a project feasibility study? 2. What factors are to be kept in mind while deciding on product/service? 3. Describe the various forms of business organization. 4. Explain legal considerations in the establishment of a small-scale enterprise. 5. What is the role of Single Window Agencies in the development of small-scale industries? 6. What kind of final clearances and from whom, the entrepreneurs are required to take as soon as the unit goes into production? 7. Describe the different stages involved in setting up a small-scale enterprise. B. Multiple Choice Questions 1. Which of the following is NOT recognized as a misconception about entrepreneurship? a. Successful entrepreneurship needs only a great idea. b. Entrepreneurship is easy. c. Entrepreneurship is found only is small businesses. d. Entrepreneurial ventures and small businesses are different 2. Which of the following is NOT on of the three areas in which the importance of entrepreneurship can be shown? a. Innovation b. Number of new start-ups c. Job creation and employment d. Bureaucracy 3. The creation of new firms is important because these new firms contribute to economic development throughbenefits that include all of the following EXCEPT: a. Product-process innovation b. Increased tax revenues c. Unemployment d. Social betterment. 4. All of the following represent countries in which the highest level of entrepreneurial activity was found EXCEPT. a. Australia b. Korea c. Norway 126 CU IDOL SELF LEARNING MATERIAL (SLM)
d. Japan. 5. All of the following are characteristics of small businesses EXCEPT: a. Small businesses are independently owned, operated, and financed. b. Small businesses have fewer than 100 employees. c. Small businesses emphasize new or innovative practices. d. Small businesses have little impact on industry Answers 1-d, 2-c, 3-d. 4-c, 5-d 8.11 REFERENCES Textbooks T1 Gupta, R.K. &Lipika, K.L. 2115. Fundamentals of entrepreneurship development & project management, Himalaya Publishing House. ISBN: 978-9351426844. T2 Ivaturi, V.K., Ganesh, M., Mittal, A., Subramanya, S. 2117. The Manual for Indian Start-ups: Tools to Start and Scale-up Your New Venture, Penguin Random House India. ISBN: 978-0143428527. Reference Books • Mathew Manimala, Entrepreneurship Theory at the Crossroads, Paradigms & Praxis, Biztrantra ,2nd Edition ,2005 • Prasanna Chandra, Projects – Planning, Analysis, Selection, Implementation and Reviews, Tata McGraw-Hill, 1996. 127 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT – 9 : REPORT – STARTING THE VENTURE STRUCTURE 9.0 Learning Objectives 9.1 Introduction 9.2 Company Overview 9.3 Product/Service Description 9.4 Industry and Marketplace Analysis 9.5 Marketing Strategy 9.6 Distribution and Sales Strategy 9.7 Operations Plan 9.8 Development Plan 9.9 Financial Estimates 9.10 Summary 9.11 Keywords 9.12 Learning Activity 9.13 Unit End Questions 9.14 References 9.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Understand the concept of company. Explain the Product and Service description techniques Describe the industry and Marketplace analysis Explain the marketing strategy techniques. Explain distribution and sales strategy. Describe the operations plan process Describe the Development plan of the organisation. Explain the financial estimates of the organisation. 9.1 INTRODUCTION Planning is the first and the most crucial step for starting a business. A carefully planned and meticulously designed business plan can convert a simple idea/ innovation into a successful business venture 128 CU IDOL SELF LEARNING MATERIAL (SLM)
Business plan is a road map for starting and running a business. A well-crafted business plan identifies an opportunity, scans external and internal environment to assess feasibility of business and arranges 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, the investors, the employees. It provides information about the various functional requirements (Marketing, Finance, and Operations& Human Resource) for running a business. Business plan is the blue print 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 feasibility of idea and then arranges resources (production/ operation, finance, human resources) in the best possible manner to make the plan successful. The objectives of business plan are: To give directions to the vision formulated by entrepreneur. To objectively evaluate the prospects of business To monitor the progress after implementing the plan. To persuade others to join the business. To seek loans from financial institution To visualize the concept in terms of market availability, organizational, operational and financial feasibility. To guide the entrepreneur in actual implementation of the plan. To identify strengths and weakness of the plan. To identify challenges in terms of opportunities and threats from the external markets. To clarify ideas and identify gaps in management information about their business, competitors and the market. To identify the resources that would be required to implement the plan. To document ownership arrangements, future prospects and projected growths of the business venture. 9.2 COMPANY OVERVIEW The Company Overview is a brief description of the company you have founded or want to found. How will it be organized? Will it be a sole proprietorship, partnership, or corporation? What are your ambitions for the company? Will it always be a small company, or do you want to grow it into an international giant? Upon reading this section, the reader should have a good idea of where you are and where you are going with your company. What is the name of our company? Does it company currently exist, or will it be forming? 129 CU IDOL SELF LEARNING MATERIAL (SLM)
How is our company organized (e.g., sole proprietorship, partnership, corporation…)? What is our overall strategy and what objectives do we have? What are our goals for the company (keep it small, grow it big, franchise it…)? What is the exit strategy for ourselves and for our investors (sell to larger company, go public, buy out investors…)? What additional information do we need to describe and organize our company? 9.3 PRODUCT/SERVICE DESCRIPTION The Product and Services section is a detailed description of the products and/or services you will be selling. You should not assume that the reader is familiar with your product/service, so be sure to explain and describe it carefully. What exactly is our product or service? What isn't it? Carefully describe What is unique about our product/service? What are its features and benefits? Do we have any proprietary rights to the product/service (for example, technology, patents, copyrights, etc.)? Why is our product/service superior to the competition, and how is it different? What additional information do we need to define our product or service? 9.4 INDUSTRY AND MARKETPLACE ANALYSIS The Industry and Marketplace Analysis section dispassionately describes and outlines the industry and the marketplace in which you will compete. When finished with this section, you and your readers should understand the dynamics, problems, and opportunities driving your industry and marketplace. What is the industry that addresses this market? What trends are important in this industry? How does this industry segment the market? What is the market we intend to serve? How large is it? What is its growth potential? What motivates customer purchase decisions? What additional information do we need about our marketplace? 9.5 MARKETING STRATEGY The Marketing Strategy section of your plan will make or break the prospects for your venture. In the Marketing Strategy section, show how you are going to fit into your marketplace. What are unmet needs in the marketplace and how are you going to fill them? How will you differentiate your product or service from your competitors? What unique features, benefits, or capabilities will you bring to the marketplace? Who are your customers? Who are our target customers? What problems are we solving for them? What are their profiles? What motivates their buying decisions? 130 CU IDOL SELF LEARNING MATERIAL (SLM)
What are the strengths of our product/service? Weaknesses? Who are our competitors? How will we differentiate our product or service? How will our product be priced? What are gross revenues per unit sold? What are anticipated annual sales? What additional information do we need to create an effective marketing strategy? 9.6 DISTRIBUTION & SALES STRATEGY How will you reach your customers? How will you close the sale with your customers? Remember, \"Nothing happens until the sale is made.\" What distribution channels will we use (e.g., direct sales, mail-order, wholesalers, etc.)? How will we communicate with our customers (e.g., advertising, promotions, etc.)? How will our product or service be sold? Who will do the selling (our own sales people, manufacturing representatives, etc.)? What are the costs associated with our sales strategy? Which costs are fixed? Which are variable? What additional information do we need to create an effective sales strategy? 9.7 OPERATIONS PLAN The Operations section outlines how you will run your business and deliver value to your customers. Operations is defined as the processes used to deliver your products and services to the marketplace and can include manufacturing, transportation, logistics, travel, printing, consulting, after-sales service, and so on. In all likelihood, about 80% of your expenses will be for operations, 80% of your employees will be working in operations, and 80% of your time will be spent worrying about operating problems and opportunities. Which operations are critical to the success of our business? Which are secondary? How will we produce and deliver our product/service? What will we do in-house, and what will we purchase (make vs. buy)? What will it cost to produce and deliver our product or service? Estimate fixed costs (plant, equipment, etc.) and variable costs (labor, materials, etc.) What additional information do we need understand and cost our operations? 9.8 DEVELOPMENT PLAN The Development section is a road map of how you are going to get from where you are now to where you want to be in the future. These steps can be as routine as securing retail space, or as critical as applying for and getting a patent on key technology. 131 CU IDOL SELF LEARNING MATERIAL (SLM)
What must be done before we can introduce our product or service to the marketplace? What are the risks? How long will it take to bring our product or service to market? What is our timeline? What are the one-time start-up and development costs of our business (equipment, deposits, fixtures, furniture …)? What additional information do we need understand and cost the development of our product or service? 9.9 FINANCIAL PLAN Your Financial Plan should be frosting on a cake. You have outlined a great business concept, demonstrated a real need in the marketplace, shown how you will execute your ideas, and now will show how much money everyone is going to make. Summarize estimates made in previous sections: A. Annual unit sales: B. Price per unit: C. Variable cost per unit (production and sales): D. Fixed costs (admin, production, and sales): E. One-time start-up costs (eqpmt, mktg, legal, etc.): F. Working capital rqd (receivables, inventory, etc.) Calculate estimated annual gross revenues and income: G. Estimated annual revenues (A×B): H. Estimated annual variable costs (A×C): I. Estimated annual contribution margin (G−H−D): Calculate break-even figures: J. Contribution margin per unit (B−C): K. Annual break-even quantity (D÷J): 132 CU IDOL SELF LEARNING MATERIAL (SLM)
L. Ratio of break-even to expected quantities (K÷A): Estimate the money you will initially need to start your business: M. Total up-front funds required (E+F): N. Additional units to cover up-front funds (M÷J): O. Break-even quantity with up-front funds (K+N): Calculate financial performance figures: P. Payback period for startup funds (M÷I): Q. Annual return on start-up investment (I÷M): R. Variable cost to price ratio (C÷B): S. Contribution margin ratio (I÷G): 9.10 SUMMARY Planning is the first and the most crucial step for starting a business. A carefully planned and meticulously designed business plan can convert a simple idea/ innovation into a successful business venture. Business plan is a road map for starting and running a business. A well-crafted business plan identifies an opportunity, scans external and internal environment to assess feasibility of business and arranges resources in the best possible way which finally leads to the success of the plan. Business plan is the blue print 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 feasibility of idea and then arranges resources (production/ operation, finance, human resources) in the best possible manner to make the plan successful. The Company Overview is a brief description of the company you have founded or want to found. The Product and Services section is a detailed description of the products and/or services you will be selling. 133 CU IDOL SELF LEARNING MATERIAL (SLM)
The Industry and Marketplace Analysis section dispassionately describes and outlines the industry and the marketplace in which you will compete The Marketing Strategy section of your plan will make or break the prospects for your venture. In the Marketing Strategy section, show how you are going to fit into your marketplace. The Operations section outlines how you will run your business and deliver value to your customers. Operations is defined as the processes used to deliver your products and services to the marketplace and can include manufacturing, transportation, logistics, travel, printing, consulting, after-sales service, and so on. The Development section is a road map of how you are going to get from where you are now to where you want to be in the future 9.11 KEYWORDS Project report provides information about the technology and technical aspects of a project. Feasibility study report is prepared to support the investment proposal. Feasibilities for the various aspects related to technical, commercial and financial are examined in detail by the experts and consultants brought in feasibility study report. Detailed project report is a complete document for investment decision-making, approval, planning whereas feasibility study report is a base document for investment decision-making. 9.12 LEARNING ACTIVITIES 1.How to Write the Perfect Business Plan? ----------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- 2.What products, services, and equipment do I need to run my business? ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 9.13 UNIT END QUESTIONS A. Descriptive Questions 134 Short Questions 1. What skills do employees need, and how many do I need? 2. How will I beat my competition? CU IDOL SELF LEARNING MATERIAL (SLM)
3. How do you prepare a project report? 4. What is Project Report preparation? 5. What is the structure of a project report? Long Questions 1. What are the 5 questions a business plan must answer? 2. How do you write a business plan presentation? 3. How do you present a project report? Describe? 4. How do I write a start-up business plan? Explain 5. What are the 10 components of a business plan? B. Multiple Choice Questions 1. Positive external trends or changes that provide unique and distinct possibilities for innovating and creating value are called _____________.? a. Strengths b. Opportunities c. Weaknesses d. Threats 2. An individual who has no prior business ownership experience as a business founder, inheritor of a business, or a purchaser of a business is called a(n) ____________ entrepreneur: a. Habitual b. Novice c. Serial d. Portfolio 3. An individual who has prior business ownership experience is called a(n) ____________ entrepreneur? a. Novice b. habitual c. Serial d. Portfolio 4. All of the following are popular demographic factors about entrepreneurs that have been studied EXCEPT: a. Self-confidence b. Gender c. Education d. Family birth order. 135 CU IDOL SELF LEARNING MATERIAL (SLM)
5. The three main responsibilities involved with managing an entrepreneurial venture once it’s up and runninginclude all of the following EXCEPT? a. Managing processes b. Managing people c. Managing bureaucracy d. Managing growth. Answers 1-b, 2-b, 3-b. 4-a, 5-c 9.14 REFERENCES Textbooks T1 Gupta, R.K. & Lipika, K.L. 2115. Fundamentals of entrepreneurship development & project management, Himalaya Publishing House. ISBN: 978-9351426844. T2 Ivaturi, V.K., Ganesh, M., Mittal, A., Subramanya, S. 2117. The Manual for Indian Start-ups: Tools to Start and Scale-up Your New Venture, Penguin Random House India. ISBN: 978-0143428527. Reference Books • P.Saravanavel, Entrepreneurial Development, Ess Pee kay Publishing House, Chennai -1997. • Arya Kumar. Entrepreneurship. Pearson. 2012 136 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT – 10 : DESIGNING ORGANISATION STRUCTURE – HR PLANNING STRUCTURE 10.0 Learning Objectives 10.1 Introduction 10.2 Meaning of HR Planning 10.3 Planning at different levels 10.4 Integrated Strategic Planning and HR 10.5 Need for Human Resource Planning 10.6 Objectives of HRP 10.7 Determinants of HRP 10.8 Strategies for HR Planners 10.9 Guidelines for Making HRP Effective 10.10 Summary 10.11 Keywords 10.12 Learning Activity 10.13 Unit End Questions 10.14 References 10.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe the objectives of HR Planning Explain the process of human resource planning Describe the strategies for HR Planners Outline the limitations of HR Planning Explain the guidelines of HR Planning. 10.1 INTRODUCTION Human resource planning is the most important managerial function of an organization. It ensures three main things: It ensures adequate supply of human resources. It ensures proper quality of human resources. It ensures effective utilization of human resources a. Human resource planning must incorporate the human resource needs in the light of organizational goals. 137 CU IDOL SELF LEARNING MATERIAL (SLM)
b. Human resource planning must be directed towards clear and well-defined objectives. c. Human resource plan must ensure that it has the right number of people and the right kind of people at the right time doing work for which they are economically most suitable. d. Human resource planning should take into account the principle of periodical reconsideration of new developments and extending the plan to cover the changes during the given long period. e. Human resource planning should pave the way for an effective motivational process. f. Adequate flexibility must be maintained in human resource planning to suit the changing needs of the organization. g. HRP or MPP is essentially concerned with the process of estimating and projecting the supply and demand for different categories of personnel in the organization for the years to come. 10.2 MEANING OF HR PLANNING Human resource planning (HRP) is the continuous process of systematic planning ahead to achieve optimum use of an organization's most valuable asset—quality employees. Human resources planning ensure the best fit between employees and jobs while avoiding manpower shortages or surpluses. Human resource planning allows companies to plan ahead so they can maintain a steady supply of skilled employees. That's why it is also referred to as workforce planning. The process is used to help companies evaluate their needs and to plan ahead to meet those needs. Human resource planning needs to be flexible enough to meet short-term staffing challenges while adapting to changing conditions in the business environment over the longer term. HRP starts by assessing and auditing the current capacity of human resources. The enterprise will estimate its manpower requirements and then find out the sources from which the needs will be met. If required manpower is not available then the work will suffer. Developing countries are suffering from the shortage of trained managers. Job opportunities are available in these countries but properly trained personnel are not available. These countries try to import trained skill from other countries. In order to cope human resource requirements, an enterprise will have to plan in advance its needs and the sources. The terms human resource planning and manpower planning are generally used interchangeably. Human resource planning is not a substitute for manpower planning. Rather the latter is a part of the former i.e., manpower planning is integrated with human resource planning. 138 CU IDOL SELF LEARNING MATERIAL (SLM)
10.3 PLANNING AT DIFFERENT LEVELS Human Resource Planning (HRP) may be done at different levels and for different purposes. National planners may make a HR plan at the national level whereas the strategists at a company may make a HR plan at the unit level. The HR Planning thus operates at five levels. HRP at National Level: HRP at the national level helps to plan for educational facilities, health care facilities, agricultural and industrial development and employment plans, etc. The government of the country plans for human resources at the national level. National plans for HR forecast the demand and supply of human resources at the national level. It also plans for occupational distribution, sectoral and regional allocation of human resources. HRP at the Sectoral Level: HRP at the sectoral level helps to plan for a particular sector like agriculture, industry, etc. It helps the government to allocate its resources to the various sectors depending upon the priority accorded to the particular sector. HRP at the Industry Level: HRP at the industry level takes into account the output/ operational level of the particular industry when manpower needs are considered. HRP at the Unit Level: HR Planning at the company level is based on the estimation of human resource needs of the particular company in question. It is based on the business plan of the company. A manpower plan helps to avoid the sudden disruption of the company’s production since it indicates shortages of particular types of personnel, if any, in advance, thus enabling the management to adopt suitable strategies to cope with the situation. HRP at the Departmental Level: HRP at the departmental level looks at the manpower needs of a particular department in an organization 10.4 INTEGRATED STRATEGIC PLANNING AND HR HRP like production planning, financial planning and marketing planning needs to be comprehensive, unified and integrated for the total corporation. HR manager provides inputs like key HR areas, HR environmental constraints, HR capabilities and HR capability constraints to the corporate strategists. Corporate strategists further communicate their needs and constraints to HR manager. The corporate strategic plan and HR plan, thus incorporates both HR and other functional plans. 139 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 10.1Corporate Strategic Plan Diagram Corporate strategic planning involves four-time spans. a. Long period (5 or more years): Strategic plans that establish company’s vision, mission and major long-range objectives. The time span for strategic plans is usually considered to be five or more years. b. Intermediate period (3 years): Intermediate-range plans cover about a three-year period. These are more specific plans in support of strategic plan. c. Operation period (1 year): Operating plans cover about one year. Plans are prepared month-by-month in sufficient detail for profit, human resources, budget and cost control. d. Short period (day-to-day or week-by-week): Activity plans are the day-to-day and week by-week plans. These plans may not be documented. Hence, the strategic plan vs. HR plan can be at four levels: a. Corporate-level plan: Top management formulates corporate-level plan based on corporate philosophy, policy, vision and mission. The HRM role is to raise the broad and policy issues relating to human resources. The HR issues are related to employment policy, HRD policies, remuneration policies, etc. The HR department prepares HR strategies, objectives and policies consistent with company’s strategy. b. Intermediate-level plan: Large-scale and diversified companies organize Strategic Business Units (SBUs) for the related activities. SBUs prepare intermediate plans and implement them. HR managers prepare specific plans for acquiring future managers, key personnel and total number of employees in support of company requirements over the next three years. 140 CU IDOL SELF LEARNING MATERIAL (SLM)
c. Operations plan: Operations plans are prepared at the lowest business profit centre level. These plans are supported by the HR plans relating to recruitment of skilled personnel, developing compensation structure, designing new jobs, developing, leadership, improving work life, etc. d. Short-term activities plan: Day-to-day business plans are formulated by the lowest level strategists. Day-to-day HR plans relating to handling employee benefits, grievances, disciplinary cases, accident reports, etc. are formulated by the HR managers. Fig 10.2Human Resource Planning in a Business system 10.5 NEED FOR HUMAN RESOURCE PLANNING Human resource planning is needed for foreseeing the human resource requirements of an organization and supply of human resources. Its need can be assessed from the following points: 141 CU IDOL SELF LEARNING MATERIAL (SLM)
1. Replacement of Persons: A large number of persons are to be replaced in the organization because of retirement, old age, death, etc. There will be a need to prepare persons for taking up new position in such contingencies. 2. Labour Turnover: There is always labour turnover in every organization. The degree of labour turnover may vary from concern to concern but it cannot be eliminated altogether. There will be a need to recruit new persons to take up the positions of those who have left the organization. If the concern is able to forecast turnover rate precisely, then advance efforts are made to recruit and train persons so that work does not suffer for want of workers. 3. Expansion Plans: Whenever there is a plan to expand or diversify the concern then more persons will be required to take up new positions. Human resource planning is essential under these situations. 4. Technological Changes: The business is working under changing technological environment. There may be a need to give fresh training to personnel. In addition, there may also be a need to infuse fresh blood into the organization. Human resource planning will help in meeting the new demands of the organization. 5. Assessing Needs: Human resource planning is also required to determine whether there is any shortage or surplus of persons in the organization. If there are less persons than required, it will adversely affect the work. On the other hand, if more persons are employed than the requirement, then it will increase labour cost, etc. Human resource planning ensures the employment of proper workforce. 10.6 OBJECTIVES OF HUMAN RESOURCE PLANNING The following are the objectives of human resource planning: 1. Assessing manpower needs for future and making plans for recruitment and selection. 2. Assessing skill requirement in future for the organization. 3. Determining training and the development needs of the organization. 4. Anticipating surplus or shortage of staff and avoiding unnecessary detentions or dismissals. 5. Controlling wage and salary costs. 6. Ensuring optimum use of human resources in the organization. 7. Helping the organization to cope with the technological development and modernization. 8. Ensuring career planning of every employee of the organization and making succession programmes. 9. Ensuring higher labour productivity. 142 CU IDOL SELF LEARNING MATERIAL (SLM)
10.7 DETERMINANTS OF HUMAN RESOURCE PLANNING There are several factors that affect HRP. These factors or determinants can be classified into external factors and internal factors. External Factors • Government Policies: Policies of the government like labour policy, industrial relations policy, policy towards reserving certain jobs for different communities and sons-of- thesoils, etc. affect the HRP. • Level of Economic Development: Level of economic development determines the level of HRD in the country and thereby the supply of human resources in future in the country. Fig10.3 Determinants of HRP Business Environment: External business environmental factors influence the volume and mix of production and thereby the future demand for human resources. Level of Technology: Level of technology determines the kind of human resources required. International Factors: International factors like the demand for the resources and supply of human resources in various countries. Internal Factors 143 CU IDOL SELF LEARNING MATERIAL (SLM)
Company Policies and Strategies: Company’s policies and strategies relating to expansion diversification, alliances, etc. determine the human resource demand in terms of quality and quantity. Human Resource Policies: Human resources policies of the company regarding quality of human resource, compensation level, quality of work life, etc. influences human resource plan. Job Analysis: Fundamentally, human resource plan is based on job analysis. Job description and job specification determines the kind of employees required. Time Horizons: Companies with stable competitive environment can plan for the long run whereas the firms with unstable competitive environment can plan for only short-term range. Analyzing Factors for Manpower Requirements on Demand Side (Demand Forecasting): The existing job design and analysis may thoroughly be reviewed keeping in view the future capabilities, knowledge and skills of present employees. The job generally should be designed and analyzed reflecting the future human resources and based on future organizational plans. The factors for manpower requirements on demand side can be analyzed by making demand forecasting. Demand forecasting is the process of estimating the future requirements of manpower, by function and by level of skills. It has been observed that demand assessment for operative personnel is not a problem but projections’ regarding supervisory and managerial levels is difficult. Two kinds of forecasting techniques are commonly used to determine the organization’s projected demand for human resources. These are: a. Judgemental forecasts, and b. Statistical projections (i) Judgmental Forecasts: Judgmental forecasts are also known as the conventional method. The forecasts are based on the judgement of those managers and executives who have intensive and extensive knowledge of human resource requirement. Judgmental forecasts could be of two types: (a) Managerial Estimate: Under this method, the managers or supervisors who are well- acquainted with the workload, efficiency and ability of employees, think about their future workload, future capabilities of employees and decide on the number and type of human resources to be required. An estimate of staffing needs is done by the lower-level managers who make estimates and pass them up for further revision. (b) Delphi Method: A survey approach can be adopted with the Delphi technique. The Delphi process requires a large number of experts who take turns to present their forecast statement and underlying assumptions to the others, who then make revisions in their forecasts. Face-to-face contact among the experts is avoided. 144 CU IDOL SELF LEARNING MATERIAL (SLM)
(ii) Statistical Projection: Some forecasting techniques are based on statistical methods. Some of them are given below: (a) Ratio-Trend Analysis: The ratio-trend analysis is carried out by studying the past ratios and the forecasting ratios for the future. The components of internal environmental changes are considered while forecasting the future ratios. Activity level forecasts are used to determine the direct human resource requirements. This method depends on the availability of past records and the internal environmental changes likely to occur in future. (b) Econometric Model: Under the econometric model, the previous data is analyzed and the relationship between different variables in a mathematical formula is developed. The different variables affecting the human resource requirements are identified. The mathematical formula so developed is then applied to the forecasts of movements in the identified variables to produce human resource requirements. (c) Work-Study Techniques: Work-study techniques are generally used to study work measurement. Under the workload analysis, the volume of workload in the coming years is analyzed. These techniques are more suitable where the volume of work is easily measurable. If the planners forecast expansion in the operations, additional operational workers may be required. If the organization decides to reduce its operations in a particular area, there may be decreased demand for the workers. If there is likely to be no change, present demand for workers will continue. The work study method also takes into account the productivity pattern for the present and future, internal mobility of the workers like promotion, transfer, external mobility of the workers like retirement, deaths, voluntary retirements, etc. Analyzing Factors forHr. Requirements on Supply Side (Supply Forecasting): Supply forecasting is concerned with human resources requirements from within and outside the organization. The first step of forecasting the future supply of human resource is to obtain the data and information about the present human resource inventory. The supply forecasting includes human resource audits; employee wastage; changes due to internal promotions; and changes due to working conditions. Some of the steps are discussed below: (i) Human Resource Audits: These are analysis of each employee’s skills and abilities. This analysis facilitates the human resource planners with an understanding of the skills and capabilities available in the organization and helps them identify manpower supply problems arising in the near future. These inventories should be updated periodically otherwise it can lead to present employees being ignored for job openings within the organization. (ii) Employee Wastage: The second step of supply forecasting is estimation of future losses of human resources of each department and of the entire organization. This is done to identify the employees who leave the organization and to forecast future losses likely to occur due to various reasons. Employees may leave the organization for reasons like retirements, layoffs, dismissals, disablement, ill health, death, etc. Reasons for high labour turnover and 145 CU IDOL SELF LEARNING MATERIAL (SLM)
absenteeism should be analyzed and remedial measures taken. Management has to calculate the rate of labour turnover, conduct exit interview, etc. This helps to forecast the rate of potential loss, reasons for loss and helps in reducing the loss. (iii) Internal Promotions: Analysis is undertaken regarding the vacancies likely due to retirements and transfer and the employees of particular groups and categories who are likely to be promoted. The multiple effects of promotions and transfers on the total number of moves should be analyzed and taken into consideration in forecasting changes in human resource supply of various departments. For example, if the personnel officer is promoted as personnel manager, 2 more employees will also get promotion. The senior clerk in the personnel department will become personnel officer and the junior clerk will become senior clerk. Thus, there are 3 moves for one promotion. Estimating the Net HR Requirements: Net human resource requirements in terms of number and components are to be determined in relation to the overall human resource requirements (demand forecast) for a future date and supply forecast for that date. The difference between overall human requirements and future supply of human resource is to be found out. Fig 10.4Estimating the Net HR Requirements Flowchart 146 Control and Review Mechanism CU IDOL SELF LEARNING MATERIAL (SLM)
Human resource planning requires considerable number of financial resources besides time and staff. Small firms may not go for it but large organizations prefer human resource planning as a means of achieving greater effectiveness and long-term objectives. J.W. Walker is of the opinion that, “In making a projection of manpower requirements, selecting the predictor — the business factor to which manpower needs will be related – is the critical first step. Selecting the right predictor in relation to the business is a difficult process. To be useful, the predictor should meet two requirements; first, it should be directly related to the essential nature of the business so that business planning is done in terms of the factor. The second requirement is that changes in the selected factor be proportional to changes in the manpower required in the business.” Thus, the human resource’s structure and system should be controlled and reviewed with a view to keep them in accordance with the plan. 10.8 STRATEGIES OF HR PLANNERS The objective of manpower planning is to help the organization to achieve its goal. For this purpose, the manpower planners have to develop some strategies. Stainer has suggested nine strategies for the benefit of manpower planners: 1. They should collect, maintain and interpret relevant information regarding human resources. 2. They should periodically report manpower objectives, requirements and existing employment and allied features of manpower. 3. They should develop procedures and techniques to determine the requirements of different types of manpower over a period of time from the standpoint of organization’s goals. 4. They should develop measures of manpower utilization as component of forecasts of manpower requirement along with independent validation. 5. They should employ suitable techniques leading to effective allocation of work with a view to improving manpower utilization. 6. They should conduct research to determine factors hampering the contribution of individuals and groups to the organization with a view to modifying or removing these handicaps. 7. They should develop and employ methods of economic assessment of human resources reflecting its features as income generator and cost and accordingly improving the quality of decisions affecting the manpower. These people are known for job hopping, thereby creating frequent shortages in the organization. Manpower planning helps prevent such shortages. Furthermore, technology changes will often upgrade some jobs and degrade others. Indian Telephone Industries (ITI) had a stronger technology to ·start with, which later developed into crossbar telephone system. This was later changed to electronic technology. Jobs created and people hired when old technologies were in use became extinct, obsolete and redundant. ITI being a public 147 CU IDOL SELF LEARNING MATERIAL (SLM)
sector undertaking, could not retrench its workers, and were subsequently retrained and redeployed to supervise the electronic system now in use. Jobs became highly technical necessitating hiring of engineers who had majored in electronics. So, ITI had no use of engineers with civil or mechanical engineering as major. Thus, ITI is in a tight spot so far as shop-floor workers are concerned, whose number is more than the demand for them. Even with regard to electronics engineers, the company is not in a comfortable position. With its existing compensation scheme, ITI is not in a position to attract talented people. This situation could have been avoided if ITI had done HRP. Another facet of the high-talent personnel is management succession planning. Who will replace the retiring chief executive? From what pool of people will top executives be selected and how will these individuals be groomed for their increased responsibilities? HRP is an answer to these and other related questions. Identification of Gaps in Existing Manpower. Human resource planning identifies gaps in existing manpower in terms of their quantity and quality with the help of suitable training and/or any other steps, these gaps can be filled in time. Existing manpower can also be developed to fill future vacancies. Career Succession Planning. Manpower planning facilitates career succession planning in the organization. It provides enough lead time for internal succession of employees to higher position through promotions. Thus, manpower planning contributes to management succession as well as development. Improvement in Overall Business Planning. Manpower planning is an integral part of overall business planning. Effective manpower planning will lead to improvement in overall planning also. No management can be successful in the long run without having the right type and right number of people doing the right jobs at the right time. Growth of the Organization. Manpower planning facilitates the expansion and diversification of an organization. In the absence of human resource plans, the required human resources will not be available to execute expansion and diversification plans at the right time. Creates Awareness in the Organization. Manpower planning leads to a great awareness about the effectiveness of sound manpower management throughout the organization. It also helps in judging the effectiveness of human resource policies and programmes of management. Beneficial to the Country. At the national level manpower planning facilitates educational reforms, geographical mobility of talent and employment generation. 10.9 GUIDELINES FOR MAKING HR EFFECTIVE Some of the suggestions for making HR planning effective are as given below: 1. Integration with Organizational Plans. Human resource planning must be balanced with organizational plans. It must be based on the organizational objectives and plans. This 148 CU IDOL SELF LEARNING MATERIAL (SLM)
requires development of good communication channels between organization planners and the human resource planners. 2. Period of HR Planning. Period of the planning should be appropriate to the needs and circumstances of the enterprise in question. The size and structure of the enterprise as well as the anticipated changes must be taken into consideration. 3. Proper Organization. To be effective, the planning function should be properly organized. If possible, within the human resource department. A separate cell or committee should be constituted to provide adequate focus and to coordinate planning work at various levels. 4. Support of Top Management. To be effective in the long run, manpower planning must have the full support of the top management. The support from top management is essential to ensure the necessary resources, cooperation and support for the success of the planning. 5. Involvement of Operating Executives. Human resource planning is not a function of manpower planners only. To be effective, it requires active participation and coordinated efforts on the part of operating executives. Such participation will help to improve understanding of the process and thereby reduce resistance. 6. Efficient and Reliable Information System. To facilitate human resource planning, an adequate database must be developed for human resources. 7. Balanced Approach. The human resource experts should give equal importance to both quantitative and qualitative aspects of manpower. Instead of matching existing people with existing job, stress should be laid on filling future vacancies with right people. Promotion should also be considered carefully. Career planning and development, skill levels, morale, etc. should be given due importance by the planners. 10.10 SUMMARY HRP or MPP is essentially concerned with the process of estimating and projecting the supply and demand for different categories of personnel in the organization for the years to come. Human resource planning should pave the way for an effective motivational process. Intermediate-level plan: Large-scale and diversified companies organize Strategic Business Units (SBUs) for the related activities. SBUs prepare intermediate plans and implement them. HR managers prepare specific plans for acquiring future managers, key personnel and total number of employees in support of company requirements over the next three years. Operations plan: Operations plans are prepared at the lowest business profit centre level. These plans are supported by the HR plans relating to recruitment of skilled personnel, developing compensation structure, designing new jobs, developing, leadership, improving work life, etc. 149 CU IDOL SELF LEARNING MATERIAL (SLM)
Short-term activities plan: Day-to-day business plans are formulated by the lowest level strategists. Day-to-day HR plans relating to handling employee benefits, grievances, disciplinary cases, accident reports, etc. are formulated by the HR managers. Labour Turnover: There is always labour turnover in every organization. The degree of labour turnover may vary from concern to concern but it cannot be eliminated altogether. There will be a need to recruit new persons to take up the positions of those who have left the organization. If the concern is able to forecast turnover rate precisely, then advance efforts are made to recruit and train persons so that work does not suffer for want of workers. 10.11 KEYWORDS Duties and Responsibilities: The primary and essential functions or activities performed by a Staff Member or group of Staff Members. Duties and responsibilities also serve as the basis for performance evaluation Attrition:A gradual voluntary reduction of employees (through resignation and retirement) who are not then replaced, decreasing the size of the workforce. Base Wage Rate (or base rate): The monthly salary or hourly wage paid for a job, irrespective of benefits, bonuses or overtime Benefits (benefits package): Benefits are a form of compensation paid by employers to employees over and above the amount of pay specified as a base salary or hourly rate of pay. Benefits are a portion of a total compensation package for employees. 10.12 LEARNING ACTIVITIES 1: How much cash will we need to start our business? Where will we get it (savings, a loan, venture capital, an angel…)? Comment your ideas. ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- 2: What must be done before we can introduce our product or service to the marketplace? What are the risks? Comment your views. ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 10.13 UNIT END QUESTIONS A. Descriptive Questions 150 Short Questions CU IDOL SELF LEARNING MATERIAL (SLM)
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