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To assess the viability of Star of India’s business plan, it is useful to consider three aspects of the plan:
- Suitability – concerned with whether the business plan fits the internal and external environment that Star of India operates in
- Acceptability – this refers to stakeholders’ expectations of the business plan
- Feasibility – this relates to how achievable the business plan is
This report will address all three aspects and show whether the plan is viable under each.
Suitability is concerned with analysing Star of India’s business plan based on an analysis of its internal and external environment to obtain its strengths, weaknesses, opportunities and threats.
Strengths and Weaknesses
Star of India’s strengths and weaknesses, derived from an analysis of its internal resources reveal the following:
- This is a definite strength as the return on capital employed (ROCE), gross and net margins are impressive
- ROCE calculated as net profit divided by capital employed and multiplied by 100 is 112% for the year
- ROCE reveals the amount of profit earned from the injection of capital or net assets into the business. This high ROCE is due to the high net profit made from Star of India’s operations
- Gross margin calculated as gross profit divided by sales multiplied by a 100 is 75%
- Gross margin reveals that Star of India is efficient in converting the cost of goods sold into income from sales
- Net margin is calculated as net profit divided by sales and multiplied by 100 – i.e. 46%
- It compares how much profit Star of India makes when compared with £1 of income. It shows how effective the business will be in controlling its expenses
These figures show that the plan is suitable from a financial perspective.
Break-even is expected to occur between August and September, by which time the total sales revenue will equal total cost for the period. The margin of safety, i.e. the excess of expected sales over break-even sales is approximately £490,000 (i.e. total sales for the year minus total sales from April – August 2006).
Marketing is a key consideration. Good money is being spent on advertising. Advertising in the industry is mainly through word of mouth and leaflets. By advertising through television and radio, the possibility to gain increased business is real.
As Star of India is an unknown quantity, it is vital that a lot of effort and money should go into marketing. However, the business could use its considerable profits to invest more in Marketing/advertising.
The price being charged for its dishes contributes to the high profits, but the question that needs to be addressed here is, is it suitable to achieve competitive advantage? If the prices are below or match industry average then it is suitable – if not, then customers would rather go to an established competitor. The prices charged are competitive.
The plan has accounted for seasonal variation as demand should rightly decrease during the summer months due to holidays.
Opportunities and Threats
In this industry, the main issues are:
- The extent of competitive rivalry
- The social behaviour of the population
- Power of customers
- Health and safety issues
Because the competition is fierce, Star of India must ensure the prices it charges at least matches the industry average. Otherwise, customers (who have a lot of choice due to the numerous competitors) will eat elsewhere, bearing in mind Star of India is a new entrant to the restaurant business. Therefore, matching industry average could be a threat as the Star of India brand is yet to be discovered and trusted
People eat a lot outside their homes nowadays (social behaviour) due to increasingly busy lifestyles, this consequently means that the opportunities for getting a good customer base exist.
Health and safety issues are very important to the government (who can close down business if unsatisfied with their health and safety initiatives or lack of it) and customers would basically like to eat in a clean environment – this provides an opportunity for Star of India.
For the business plan to be acceptable, it must meet the needs of the main stakeholders, who in this case are:
- The owner
- The customers
- The Government
- The employees
These people will have different needs. The business plan, on the whole will be acceptable to these shareholders due to the following:
The owner is interested in:
- Making a profit
- Increasing the number of customers
- Reducing costs
The plan reveals that all of these will be met.
As mentioned previously, ROCE, gross margin and net margin forecasts are impressive indeed and would no doubt exceed the management’s expectations especially during the first year of operation. There is also a positive cash flow in all but one month. This is important for the business to be able to honour its credit commitments as they fall due. Star of India can also use the profits to grow the business. The plan also indicates an increase in the customer base, starting with 1820 customers in April and ending the year with a forecast of 7000. Again, this indicates a growth plan, which should be acceptable to the owner.
Although costs will be rising, this will be at a slower rate than revenue – again, this is acceptable.
The customers will be interested in obtaining quality food, at competitive prices in a clean environment, delivered with good customer service. Star of India is confident of achieving all of these.
To achieve the service needs of customers, the employees need to be well trained and highly motivated. The plan for the next financial year is to use the profits to train and develop new and existing employees and also to reward them through incentives.
The government needs to ensure that Health and Safety standards are being met, taxes are being paid and that customers and employees are not being exploited – consequently, Star of India is confident that the government will be acceptable.
The employee and management are experienced, therefore, delivering quality food through superior customer service is feasible.
The business plan reveals there are enough resources to meet the costs of the business – arguably too much resource. How many new businesses could make such vast amounts of money? The plan has barriers in the form of competitive rivalry, so the forecasts could be at risk of being regarded as too optimistic, admittedly.
The prices charged may need to be reviewed, if they are too high. Even if they reflect industry prices, it would be advisable to lower them as Star of India is a new business. This will ensure more customers who are made aware through advertising, will be attracted to the eatery, thus making the sales forecasts more realistic. This could be done as a promotion, for instance, for six months.
More money could also be allocated to advertising from the vast amount of profit to ensure the optimistic customer targets are achieved.
The plan is very viable, when taken into account its suitability and acceptability.
However, although it appears feasible, Star of India could be a bit cleverer to achieve high market share and thus competitive advantage by cutting its prices – this should make it more feasible.
The business should be an immense success if these factors are taken into account.