A Business Plan or Strategy - Essay Example

Name of Student Name of Instructor Name of Subject Date How to Prepare and Use a Business Plan? This paper seeks to discuss and analyze about a how a business entity will prepare and use a business plan or strategy to attain it business objectives. We will use the case of General Motors as an actual example to demonstrate the use of a business plan. A business first and foremost comes into existence because there are needs wants to fill. These needs and wants of customers motivate an entrepreneur to do business who would try to serve these needs and wants by providing a product or service. In delivering however a product or service to the customer, there are other entrepreneurs (through their companies) who are thinking same thing or other entrepreneurs who have been there ahead; hence there are thus competitors who would normally compete among each other in trying the provide the best value to these customers. Each entrepreneur (or business entity) will therefore need to have a plan to deliver the greatest value to customer in meeting those satisfy these needs and wants at the minimum cost possible. When he put up his business and he expands the business the businessman would realize that there are both external and internal factors that affect his or her business. External factors would refer to the industry opportunity and threats. The businessman finds out that he belongs to an industry, which may be defined as the groups of firms satisfying the same needs and wants. Industry opportunities are chances or probabilities for companies to make more profits in terms of higher demand over supply. Industry threats on the other are probable future events that may cause lower profitability of the firms in the industry. A company may a adopt business plan or strategy1 , using the SWOT, which stands for strengths, weakness, opportunities and threats. Strengths refer what can company may use of to further profitability2 while a weakness may refer to what may hold or prevent the company in attaining its desired objectives. To know the company’s strengths and weakness, which are internal to the company, one must have a basis. It can use financial analysis in determining the same strengths and weaknesses. As to how should a company makes use of the strategy in relation to company strength and weaknesses, the company must have strategies that will make use of company strengths but must avoid being trapped by its weakness or that such company’s strategy may improve or correct such weakness. As to industry opportunities and threats the company, the company may make use of PEST3 or Porter’s five Forces4. PEST stands for political, economic, socio-cultural and technological environments or Porter’s Five Forces include knowledge the of the extent of rivalry among firms in the industry, the powers of buyers and sellers, the availability of substitutes and the ease or difficulty of entry. As how will the business plan or strategy be related with the opportunities and threats as will be extracted, the company must take advantage of such opportunities and it shall be able to protect the company from industry treat. As indicated in determining the company’s strengths and weakness, the company needs to have financial statements for financial analysis. Financial statements may take the form of balance sheets, income statement and cash flow. Financial Analysis will tell something about the company’s profitability, liquidity and solvency. Let us draw a business plan or strategy for General Motors. The company is engaged into automotive production. Since it sells it product, the company is also engaged into marketing, financing and insurance operations. Its extent of operation of vehicles is worldwide, largely in North America. Its finance and insurance operations pertain to General Motors Acceptance Corporation (GMAC), a wholly owned subsidiary of GM, which provides a broad range of financial services, including automotive finance and mortgage products and services.5 The bases of the plan of strategy are the SWOT which stands for strengths, weaknesses, opportunities and threats. The company therefore had the following strength and weaknesses based on financial analysis. GM’s has remarkable liquidity, posting a very high with quick asset ratio of 2.58 in 2005 and 3.24 in 2004, while current ratio reflected at 3.46 in 2005 compared with 3.94 in 2004 (See Appendix A.). Liquidity determines a company’s capacity to meet currently maturing obligations, hence the company is deemed to have strength here that it can use The company’s solvency appears very dangerous at a debt to equity ratio of 16.38 in 2004 and declining further to 29.72 in 2005. It means that in 2005 the company had a liability level of almost thirty dollars ($30) to match every one dollar ($1) investment6 by creditors (See Appendix A.). This indicates a very high risk for the company, hence this should be considered as weakness. The company’s profitability looks dismal. A very low gross profit margin of 11% in 2005 painted the picture, which actually further went down from 17% in 2004. Gross margin indicates that General Motors earned 11 cents for every dollar sale made in 2005. (See Appendix A) That low gross margin in 2005 was already a very tight situation and would not be enough to cover operating and interest expenses. Hence this should be considered another weakness. What could be industry’ opportunities and threats? The industry opportunities that could be made available to company are the ever growing global economy and the presence of economies of scale7 as barrier to entry because of large investment for companies to come in the industry. As to industry threats, GM needs to be ready and prepared about the escalating cost of heath care in the US. With its very big number of employees who may avail of medical benefits puts the company in a very risky situation. Having known the company’s strength and weaknesses and industry opportunities under the SWOT model, what should then be GM’s business plan or strategy based on analysis made? The company claimed to have reduced the number of its employees. The company should continue reduction of its employees to avoid the further threat in increasing health care cost in the US. It should cut the big cause of its headache by improving its cost of doing business. In this case it would able to improve on its weakness of low profitability while using its strength of liquidity by offering early retirements or terminations of labor contract. This strategy will also put allow the company to take advantage of being in the industry which has been characterized by presence of economies of scale and preventing not much companies to come in the industry. Conclusion A business plan or strategy is a deliberate move that is best prepared with due consideration to the external and internal factors of business. It is should be more than a reaction since it does not wait for things to happen before is used. It should be deemed more as an act of pre-emption on the part of companies who may want to anticipate different variables of the future. As a simple rule, every business must earn profits high than its cost of capital to satisfy its stakeholders on sustainable basis over the short run and the long run. We have seen how to apply a simple business strategy in the case of General Motors given its strength of high liquidity weaknesses of poor profitability and its being highly leveraged, industry opportunities of expanding world economies and difficulty of entry due to economies of scale and industry threat of escalating cost of medical services in the US. By continuing in further reduction of its employees will directly address the identified threat while making use of the company’s liquidity. This plan will also improve on company’s weakness and hence will eventually provide the company the need profitability to take advantage of the expanding world economy and the presence of economies of scale in the industry. Works Cited: Brigham and Houston (2002) Fundamentals of Financial Management, Thomson South-Western, London, UK General Motors, Annual Report of 2005, 2005{www document} URL, http://www.gm.com/, Accessed February 4, 2007 Papers For You, What is Pest Analysis?, 2007 {www document} URL http://www.coursework4you.co.uk/pest.htm, Accessed February 4,2007 Papers For You, What is Porter's 5 Forces analysis?, 2007{www document} URL http://www.coursework4you.co.uk/porter.htm , Accessed February 4,2007 Porter, Competitive Strategy, The Free Press, USA, 1980 Samuelson and Nordhaus, Economics, McGraw-Hill, Inc, London, UK, 1992 Van Horne, Financial Management and Policy, Prentice Hall International, London, UK, 1992 Read More