DYNAMIC STRATEGIC PLANNING -- how to create dynamic business plans

Prof. Richard de Neufville

A new course: The course should be attractive to a wider range of students than before. It has a brand-new, innovative format this year.

The course differs from earlier offerings in two ways:

  • It will not use advanced computer tools .
    •  This is because the subject only covers a week and does not benefit from a preparatory course; therefore there is no time to cover these tools adequately. A working knowledge of Excel is all that is required.
  • It deals explicitly with the use of options to manage business risks (i.e., "real options").

Learning process: Students will learn by doing. They will prepare their own business plan, procedures focus on the identification of risks, the analysis of their consequences, and the management of these risks by using "real options', that is, options that relate to the actual operation of a business.

Throughout the course, the students will be learning technique and developing their business plans in parallel. The technique motivates improvements in the business plan, and issues in this plan motivate the techniques.

Overall schedule: The course has three phases:

  • A preliminary phase before the first meeting, in which students prepare themselves through reading and thinking;
  • The presentation of the course itself; and
  • A final phase in which students write up their business plans using the materials presented in class.

This structure extends the course beyond the week of presentation, so that students can assimilate and digest the material thoughtfully, rather than try to cram it into a few days.

Grading: Each phase of the course will be graded according to these criteria:

  • At the end of the preliminary phase, on the first day of class, the students should hand in the preliminary assignments. These will be graded according to whether they have been (not on their correctness, since the students will not have had a chance to meet the teacher). 20% of total mark
  • At the end of the classroom phase, students will be graded on their performance of the daily assignments, their participation in class and their attendance. 50% of total mark
  • The final presentation will be graded for 30% of the total mark.
Time Technique Joint Business Plan
Preliminary

Phase

Read Chapter 16

Do Problem 16.10

  Look at business plans

Prepare your own plan

Monday, 13/V Lectures: Decision Analysis; Risk. Sessions 10; 12; 73.

Solve Problem 16.12

Overview of course Discuss your business plans

For Tuesday: identify and justify 3 scenarios of uncertainty in costs or markets

Tuesday Chap. 15, 17. Lectures: Bayes' Theorem; Value of Information. Sessions 11, 13. Exercises from book Discussion of uncertainties in actual business plans Discuss Scenarios

For Wednesday: calculate value of information about scenarios, in terms of NPV of plan

Wednesday Lectures: NPV process is inadequate; Value of Flexibility; Introduction to Options. Sessions 68, 69, 70 Discuss options businesses use in practice Discuss value of info for plans.

For Thursday: identify actions that could provide flexibility: delay, accelerate, abort plans

Thursday Lectures: Black-Scholes and issues in calculating Option value. Sessions 75, 76, 77 & 78. Discuss cases illustrating value of real options Discuss how your options create value by avoiding risks, seizing opportunities. For Friday, Calculate the value of options
Friday Review outstanding issues Workshop tutorial Prepare final presentations
Saturday   Help Improve Present Draft Presentations
Final Write up     Final Presentation

Details of assignments

Preliminary phase:

  • Chapter 16 of Applied Systems Analysis (and other chapters) is available at http://msl1.mit.edu/mib/Paris_2001.shtml (go to the bottom of the page under "supporting materials")
  • Sample business plans in many fields are available on the web, for example at: www.Bplans.com and at www.businessplans.org
  • Your preliminary plan should at a minimum, for a period of 10 years:
  • Identify and describe business
  • Define market and forecast sales of your product in terms of price and quantity;
  • Describe development of business in terms of investments in phase 1, 2, 3, etc
  • Define costs of production, distribution, etc.
  • Thus calculate net cash flows by year
  • Calculate Net present value of business and its prospective rate of return

In class phase: