Archive for the 'Business Planning' Category

Fleeting Competitive Advantage - Sustainable Innovation

Published
by
Michael McKay
on 30 September 2008
in Business Planning and Management
. 0 Comments

What does sustainable competitive advantage mean to you? Is it a competitive advantage that has a half-life longer than Uranium or do you use sustainable in the sense of a renewable resource?

I much prefer the later analog. Despite IP protection, despite trade secrets, there is nothing so fleeting as a competitive advantage. Sustaining the competitive advantage takes real work.

Innovation is the key, and not just product innovation. Last year, I attended a presentation from Larry Keeley from the Doblin Group as part of the Wisdom Exchange. His message was simple: Innovation is a discipline - which means there is a process involved. People commonly think of innovation in the narrow context of products. However, there are at least nine other areas commonly used to innovate a business in addition to product innovation. Product innovation alone has a 4% success rate. Better innovation tackles change in at least six of the following ten areas:

  • Finance

    • Business Model - how the company makes money

    • Networking - enterprise structure, value chain and partnerships

  • Process

    • Enabling Processes - Assembled capabilities you typically buy from others

    • Core Processes - proprietary processes that add value

  • Offerings

    • Product performance - basic features, performance and functionality

    • Product systems - extended systems that surround the offering

    • Services - how you help the customers

  • Delivery

    • Channel - how you connect your offering to the customer

    • Brand - how you express your offerings ideas and benefits to the customers

    • Customer Experience

As a small case study, consider Nescafé reacting to competitive entrants such as Starbucks. Here is a blog on the subject by Thomas Otter entitled Simplicity, elegance and the Java bean. In his post, Thomas describes his adoption of the Nespresso Cube - a coffee maker with a cartridge system that is very easy to use. The product highlights a brilliant piece of innovation in the face of competitive pressure.

Nescafé`s problem: as the dominant coffee company is the world, they missed the boat on speciality coffee shops which changed the way people view coffee and created a stigma around Nescafé`s dehydrated products as inferior.

The Challenge: Regain competitive advantage by getting people to drink coffee in their homes again.

The Solution: Convert an office coffee product originally invented in 1975 into a household device (Product Systems and Core Processes). Partner with a leading design firm and create an elegant and simple device that provides espresso quality coffee with little fuss and much faster than a regular espresso machine (Product Performance and Customer Experience). Change the distribution model from grocery store sales of a commodity product to a web-based subscription service with home delivery (Channel). Use advertising and an excellent web site to build a brand (Brand). Build a community around the machines and coffee (Networking).

The Result: 25% annual growth since its launch in 1988.

The key here was not the product - that existed since 1975. It was the change in the channel. This was innovative brillance.

No Strategy Survives Contact with the Market

Published
by
Michael McKay
on 29 September 2008
in Business Planning and Strategy
. 0 Comments

The recent collapses of the financial markets highlights the existence of change as a force of nature in the business world. Change happens. All the time. If stability doesn’t exist, it doesn’t make sense to plan strategy around stable business markets.

To paraphrase Helmuth von Moltke the Elder, the Chief of Staff of the German Army in the 1800’s: no strategy survives contact with the market. Rather than indicating that strategy is pointless, the comment is meant to show that strategy must react to changes in the market. It must be fluid rather than fixed, open-minded rather than dogmatic. It is a game of options and optimization.

The key, then, to effective strategy development is to ensure you have options and contingency plans and that you are continuously working to develop and optimize these plans. To quote Moltke again, “Plans are nothing, Planning is everything”. The essence of this thought is that the plan will invariably change before it is completed so don’t concentrate on the plan, concentrate on the processes of planning. The plan will be obsolete as soon as you e-mail it.

The Mechanics of Money: Building Business Plans

Published
by
Michael McKay
on 26 September 2008
in Business Planning and Financing
. 0 Comments

Any business plan needs proforma financial statements regardless of whether it is boot strapped or VC funded. As the owner, founder CEO, your plan must show that you are going to make money and show it in a way that other people can easily understand it. Financial statements are the key method.

(Dear reader, if you are an accountant, please read no further, it will be a waste of your time. If not, I am assuming you have a basic understanding of accounting processes.)

Generating proforma statements is not a trivial undertaking. Fortunately, spreadsheet software was invented for just this purpose which makes the complexity much easier to handle. They key to designing a good set of proforma statements lies in understanding the mechanics of how value flows around the various accounts on the financial statements. Peter Kemball, CEO at Acorn Partners, likens this to a plumbing problem. Its is a good analogy with lots of fun clichés. Use your house as an example. Water (value or wealth) flows in and flows out. Within your house, you have reservoirs (accounts) where water can be stored and pipes (the rules) which govern the flow around the system. The goal of business is, simply put, to keep more water flowing in than flows out until the house floods (which, in the analogy, would be a good thing).

Note that in the analogy, water is equated to value not cash. Cash is just one “reservoir” of value but there are many reservoirs in the company where value is stored. So, as well as cash flow, think of value flow in the company. If you can keep increasing the value, you can likely find ways to manage the cash flow. Value can be monetized and converted to cash if need be. The clear default for startups is converting equity to cash by getting investors to join the company but it not the only choice. You can also convert the value in your accounts receivable to cash using Factors or speciality investors. Sell your future subscription income, trade on tax credits - it is all possible. This is one area of accounting where creativity pays.

In designing your financial plumbing, you need to select the accounts to use and the rules that govern how the money will flow around. These decisions will eventually drive the selection and setup of your accounting software. Are you, for example, running a product business which will require inventory with accounts for finished goods, work in progress and raw materials or is the business based on a service model with no inventory? It is important to define these at a rather low level but not so low that the account becomes trivial. The point of this exercise is not to create a Rube Goldberg contraption, but to manage the complexity of the whole by breaking it down into small and simple components that are controlled by your assumptions.

Some key assumptions include:

  • Growth rates and revenue
  • Cash conversion times
  • Fixed, variable and semi-variable costs
  • Fixed asset costs & depreciation
  • Interest rates
  • R&D, Marketing, Operations and Administration costs and time lines

Once you have the plumbing designed you need to translate the design to your financial spreadsheets. Here are my key time savers:

  • Don’t worry about format of the working sheets.
  • Keep all your assumptions on one sheet along with the key summary performance graphs and data generated by the other sheets.
  • Each account needs its own sheet. Columns are set up as weeks or months and rows are the elements of plan that affect that account.
  • Some costs are too complex to model within an account. Use separate sheets for these and then link the costs back to the relevant accounts.
  • The sheets used to display the summary financials should only have links and calculations on them - you should never have to enter values on them. The balance sheet should draw all its information from the subordinate accounts with the exception of cash and retained earnings which come from the cash flow and income statements respectively.
  • Get the model working before you try to make it presentable. By working, I mean the balance sheet should always balance as you change the assumptions.
  • Generate several sheets for the presentable financial summaries and tables that you can link to in your business plan documents. Spend the time to make these sheets look good.
  • Keep data in one place. Use DDE or ODB links to connect the spreadsheet model to your documents so that the documents are updated automatically. As much as possible, keep the text in your documents vague and refer to tables and graphs that you have linked to. This will save lots of time in revising the words as you modify your assumptions.

Once all of this is done, you will have a solid model on which to assess your assumptions and build what-if cases. While you may start out with good guess at what the critical assumptions are, the model will help you identify just how critical they really are. It will also help you determine how much cash you will require to succeed and the creative ways you can use to get it.

Having Difficulty Finding New Business Ideas?

Published
by
Michael McKay
on 13 September 2008
in Business Planning
. 0 Comments

The rather new Entrepreneurship and Innovation Club in Ottawa is a bit different then other networking groups I’ve attended. Composed of ex EMBA graduates from the University of Ottawa, it combines networking, presentations from members and more homework - as if the current students didn’t have enough already.

At last nights meeting, Rachel Hancock led a session on developing new business ideas. She outlined a process to follow that helps in developing ideas. At first, it seems straight forward. Basically (and with far too much brevity) it is: examine trends in the markets; identify challenges that are developing; use your experience to qualify them; from the challenges identify opportunities and then study these using the standard market and business planning methods.

The trick lies in letting go of your self-imposed constraints. In the small group I was working with, we had a lawyer, a green energy developer, a incubator, and me - a general manager. We looked at technological, social and environmental trends and came up with a company that would develop green energy using an open-innovation (read open source) model - hardly innovative given our backgrounds but illustrative of the constraints we impose on our thinking. Breaking out of these constraints is necessary to finding good new ideas that are more than just bits of your past experience.

This is a common theme in discussions about creativity. Thinking laterally and letting the brain play with the data once you’ve digested it is part of the process. The hard part is being open to the new ideas when your brain passes them on to you. To me, this sounds a bit like Obiwan’s advice to Luke: “Use the force” but it is necessary or you will be stuck in a trap of your own making.

This isn’t to say the process is easy. Outside of the classroom, the search for the next big thing is a serious and time consumming effort. Lots of data needs to be gathered and digested. Just take a break now and then to let your brain play.

Good luck with your search.