How to Plan a Business
You have an idea for a new business. You wonder if it has the potential to be successful. If you are like many people, you will think about it for a while, and then let the idea dissolve into the background. Everybody will agree that starting a new company is hard work. But even analyzing a new business idea to determine if it is feasible can be daunting. This help section assists you in determining if your business idea is feasible.
A business idea becomes feasible only when many dozens of conditions are met. To name just a few:
Are sufficient customers interested in buying the product or service that the business intends to offer?
Do customers see sufficient value in those products so that they are willing to pay the asking price?
Does the business have the resources (money and people) to reach potential customers?
Are the company's expenses low enough so that it can operate profitably?
Will competitors easily steal away your customers?
Understanding Your Business Context
Fundamental to starting a business is having a business strategy. Business strategy is the process of pulling together every aspect of business to lead your company to create value for its stakeholders. Before developing a business strategy for a company, you should thoroughly understand your market and industry as well as your internal capabilities and limitations as described by Mullins [Mullins, J, The New Business Road Test: What Entrepreneurs and Executives Should Do Before Launching a Lean Start-Up, 4th edition, Harlow, UK: Financial Times Press, 2013.]:
The macro market, that is, demographics of the general market you are aiming for. If you are creating a fast food restaurant for diabetics, how many diabetics are there? And are their numbers growing or shrinking? If you are creating a company to provide assistance to early-age retirees, how many individuals are retiring early? And are their numbers growing or shrinking? When tracking dimensions of a macro market, you could measure it in terms of number of customers, number of dollars spent for products like yours per year, or number of products like yours sold per year.
The micro market. As an entrepreneur, you need to focus on a specific target market that you can successfully penetrate. By aiming for a specific (usually narrow) target market, you can create a marketing campaign aimed directly at that market and its unique pains. Members of that market then quickly see how your solution addresses their pains and become easy converts and thus customers. On the other hand, if you aim for a more general market, your marketing campaign will have to address more general pains by necessity, and will then be successful at converting a lower percentage of the eyeballs that come in contact with the marketing campaign. You want all odds in your favor when you start a company. Meanwhile, start with just one target market; if you start with two, you'll double your marketing costs (or you'll halve the effectiveness of your marketing by watering down the message). The research you need to do concerning possible micro (aka target) markets includes characteristics such as size, growth rate, accessibility (i.e., how easily can you find potential customers?), ease of conversion (i.e., do potential customers “feel the pain” vs. do you have to first convince them that they have a pain? how easily can you convince them that your solution to their pain is by far the best solution available?), and so on.
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Threat of entry. Ideally, (a) you want it to be easy for your start-up to enter the industry, and then (b) once you enter, you want it to be incredibly difficult for others to enter and subsequently compete against you.
Supplier power. Every company depends on other companies to furnish it with components and services critical to its success. In some cases, these components are parts of end products sold to customers. In other cases, they are outsourced services (such as manufacturing or software development) that directly affect product quality in the eyes of customers. In other cases, they are services that support the infrastructure of the company. The issue here is the degree to which those other companies have control over you. If a supplier's quality falters, do you automatically fall victim? If a supplier chooses to increase prices by 30%, must you comply? If a supplier goes out of business, are you forced out of business as well? If a competitor signs an exclusive sourcing agreement with your supplier, are you squeezed out? To the degree possible, develop business strategies that eliminate, or at least limit, the ability of suppliers to exercise control over you.
Buyer power. A company also depends on customers to continue to purchase its goods and services; otherwise it will be out of business. If customers can demand lower prices, higher quality, different features, etc., from you, and then enforce that demand by ceasing to purchase from you, they are exhibiting buyer power. Obviously, as long as you are the only company that provides some product to a market, buyers have little power. However, success always breeds competition, so such a landscape is always short-lived. Buyers have increased power when it is easy for them to switch brands, and when your products are relatively undifferentiated (i.e., are similar to that of competition).
Threat of substitutes. The “threat of substitutes” quality of an industry is the degree to which customers can choose to not use your product, not use any of your direct competitors' products, but instead address their need in an entirely different fashion. For example, in the electronic note taking industry, over 200 small companies compete with 2-3 very large companies for customers. They are all direct competitors. But this industry suffers from a strong threat of substitution from at least two sources: (a) pen and paper, and (b) standard word processors on tablets.
Competitive rivalry. Competitors in all industries are by their very nature, well, competitive. The question, however, is the extent to which competitors are likely to make moves to ensure your failure.
The micro industry. The micro industry is the unique and sustainable advantage that your company brings to the industry and ultimately to the market. It will be the subject of the next section, “Formulating a Business Strategy.”
Your internal characteristics. For established companies, current financial health, core competencies of employees, realities of the physical plant, and expectations and risk tolerance of current shareholders provide major limitations on what business strategies are possible. In a start-up, many of these “what is” conditions are not present. However, in their place, “what can be” conditions appear.
Formulating a Business Strategy
Because businesses are complex, strategy spans many disciplines: product definition, product design, marketing, sales, finance, accounting, organization, leadership, governance, and operations, just to name a few. We will now survey some classic categories of business strategies as they apply to start-ups. Here is a list of “strategic bits” for each aspect (product, features, market, price, and so on) of business strategy. A complete business strategy would include at least one strategic bit from each aspect. Combine strategic bits in innovative ways to create entirely new business models. As you develop your strategy, it is important to realize that your strategy needs to be better than the competition in some way: either better by design, or at least better executed.
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Cash. As a founder of a company, you have few responsibilities more critical than preventing the company from running out of cash. One half of that is minimizing cash outflow and the other is maximizing cash inflow. We have already discussed some techniques for minimizing cash burn related to payroll and expenses, but other strategies exist as well. For example:
Minimizing accounts receivable (A/R). By collecting payments from customers upfront rather than allowing them to pay you, say, 30 days after receiving your product, your company will, on average, have much more cash on hand. How much? Roughly 8% of annual revenues! Other strategies for minimizing A/R include validating creditworthiness of customers before doing business with them, converting checks into electronic funds transfers, accepting credit card payments, and so on.
Maximizing accounts payable. By negotiating best possible terms with major suppliers, you can also reduce your cash burden. Once again, if you can negotiate 'net 60' rather than 'net 30' terms on your payments to suppliers of your raw materials, you can increase your company's cash on hand by another 4% (assuming that your cost of raw materials represent half of your revenues).
Twelve percent may not seem like much, but if you can succeed at implementing the above two strategies, you will have 12% more cash on hand, and that means you might need to attract 12% less money from outside investors, which means founders might end up owning 12% more company. Now 12% sounds like a lot! To explore ways to get cash into your company, read the blog post
www.offtoa.com/wp/start-up-gets-cash/.
Growth vs. Profits. A question often asked by entrepreneurs is “should I focus on revenue growth or on profitability?” The classic answer is “yes.” Mark Suster
Suster, M, "Should Startups Focus on Profitability or Not," December 2011] presents an excellent justification for why it might be acceptable for some start-ups to achieve high growth without achieving profitability, i.e., because they are reinvesting what would normally be their profits back into the future of the company. However, he is talking about companies that have chosen growth in lieu of profits. If your business is such that you
cannot achieve profitability you
do have a problem. Your start-up is going to be successful when you have the ability to choose whether you want growth or profitability!
Role of Business Accelerators
Business accelerators are environments in which start-ups can immerse themselves for 3 to 6 months surrounded by committed mentors. Although entry is highly selective, the “graduates” from such programs are armed with a wealth of great experience and knowledge about how to run a company, and most accelerators invest a nominal amount ($10,000 to $30,000) in the company in return for a small equity stake. Fundamental to most accelerators is the concept of getting to market as quickly as possible with a minimally viable product (MVP), understanding what the market really needs, and iterating. Accelerators are now available all over the World; the two largest in United States are TechStars and Y Combinator; you can learn about all of them from the Global Accelerator Network. Offtoa is a perfect match for companies in business accelerators because it (a) greatly reduces the effort required to produce financial plans expected by most investors, (b) takes the pain out of financial planning by reducing it to the statement of business assumptions, (c) allows inventor-founders of a start-up to focus their effort on product development and market feedback, and (d) facilitates rapid and guided pivoting.
Note: Some of the above has been extracted from Davis, A., Will Your New Start Up Make Money?, Scrub Oak Press, 2014.