Where Is Your Operation Headed Next?

June 26, 2002

Recently, my company surveyed nearly 100 randomly selected small to medium-sized firms across the country. What we learned about their business planning techniques was startling. For example, eight out of 10 of those surveyed had no idea whether or not their operation would grow during the next year—let alone where they were headed for the next two to three years. Less than half knew if they were profitable overall. More than 85 percent had no idea which areas of the firm were losing money.

Recently, my company surveyed nearly 100 randomly selected small to medium-sized firms across the country. What we learned about their business planning techniques was startling. For example, eight out of 10 of those surveyed had no idea whether or not their operation would grow during the next year—let alone where they were headed for the next two to three years. Less than half knew if they were profitable overall. More than 85 percent had no idea which areas of the firm were losing money.

Several people we talked to indicated they had created a business plan, but that it had been compiled strictly for the investors or the bank. It was not the one they were following in developing their business. In short, it was an excellent story about the industry, marketplace and firm’s “position” in the market, but that’s all. It had no relation to reality.

Only a few organizations said they had done anything beyond this cursory type of planning. Several people had said

               “I don’t need the written plan, because I know where we’re going.”

               “We’re too busy making sales to bother.”

               “Who needs nonsense like that? We know what needs to be done and the kind of people we need for the task.”

               “We’re going to do ours next month.”

These people are headed for real trouble, because business today just isn’t that casual—it’s highly competitive. Now, a sampling of slightly fewer than 100 officers in business isn’t a true statistical sample. And perhaps the results shouldn’t be too surprising, since most small businesses are young, vital, full of optimism and very lean. Still, prudent business planning ought to be more evident than our survey suggests because a corporate business plan is vital to the success of a business.

The Need for Plans

Why all this concern over a corporate plan? How else can you determine your organization’s direction? How else can you identify your market, predict your growth rate and anticipate your profit? A corporate plan will provide direction in choosing the kind of people you’ll need, tasks they’ll have to accomplish and timing for adding these people.

A sound corporate strategy plan should tell you who, what, where, when and why.

Planning Stages

A corporate plan does require thinking and planning, but it isn’t all that difficult to carry out. And, while it is no insurance against failure, it can point out pitfalls as well as opportunities that will more than pay for the effort required.

All businesses go through it one way or another, and it takes only a few steps to start the process. Regardless of the type of operation you have, you have to do more than simply say, “we’re in business.” You have to set up guidelines for your future. And since it’s necessary, why not make it effective at the same time?

First of all, spell out the mission of your organization. Whether you’re providing a service or a product, you have a mission. Given some time to think about it, you can probably crystallize your thinking to define a very specific organizational image. The act of putting it down on paper will help reinforce your direction. This corporate mission will determine the market areas you are going after and the products or services you’re going to develop or sell. Geography, areas of expertise and targets of opportunity all will have a bearing on the organizational mission you establish.

Next, establish a general corporate philosophy. That could mean you are going to develop and sell to businesses and, more specifically, to service industries. Or perhaps you’re going to run a price-driven operation with minimum after-sale service. Maybe you’re going to maintain a strong inventory of quality product and provide considerable sales assistance and service. Or you’re going to develop a new web portal that small service firms can come together on to sell to large, global organizations.

Continue developing your plan by establishing exactly which goals you want to achieve long-term—three, five or 10 years from now. These goals can be in market share, services provided or product lines carried, primary and secondary market areas or whatever specifics you select.

Now you’re finally in a position to be definitive. List your specific objectives such as “we want to have 35 percent of the municipal/private sector systems in the market in our area,” “we want a 25 percent increase in business services each year for the next three years in this portion of the state,” or “we want our 100 best customers to increase purchases 35 percent in the coming year with us.”

All of these objectives can be measured. And the reason you want to be able to measure them is to ensure that you’re able to track how well you’ve done during any given period.

Once you’ve developed your objectives, you’re in a position to make similar specific recommendations on how to meet those objectives. To do so, develop a planning schedule, then a task plan and finally a plan format. The task plan is where you put down ideas that will be discussed and the plan format will include a detailed discussion of each business unit’s strategies, duties and goals.

Next, generate a list of assumptions. These are the assumptions under which you are going to operate, and a compilation of strategic issues. One way to develop these issues is to look at your organization’s history, the history of the market, the history of the industry or trends from other areas.

The information you put down in this selection will help you forecast trends more easily so you can capitalize on them when you are riding the curl of the wave rather than the end of the wave.

Analyzing New Business Projects

Not even AT&T or GE can or will launch into a new business area just because it looks like fun, looks profitable or looks like something it would like to do.

Smaller organizations must be even more careful. They need to analyze their new business projects. This means conducting an analysis of the market and technology as well as the financial and profitability factors. Only after this has been completed can you determine if the market even exists, whether it can be developed and the availability and cost of labor and services, as well as the overall costs.

We know of organizations that have gone through all of the analysis with a very fine pencil, only to find out that the costs would be too high to produce a reasonable return for the owners.

During the analysis process, you must first establish the objectives that are to be achieved. This means determining the type of product(s) or service(s) the market needs, and how successfully the product(s)/service(s) can compete.

Next, you have to decide if it is worthwhile to even begin to examine the feasibility of the project in detail. If you decide to take the plunge, then you must determine the depth of the study, its time limit and cost.

Once the study is completed, the results will give you a description of the market, an outline of processes and people needed, the investment and cost of the new operation, profit projections and a synthesis of the major problems/risks you will be facing.

The analysis stage permits you to examine various options in marketing, technology and finance. Market analysis involves searching and analyzing information that can help identify, isolate, describe and quantify the market.

The technical analysis helps determine whether or not the project is even feasible, as well as the projected cost. The financial analysis is the equivalent of preparing a financial statement for the project. This helps you and your financial institution determine whether or not the project is commercially profitable, and how much of an investment will be necessary.

Diversification, Divestment

Since today’s business climate is in constant turmoil and changes dramatically—overnight sometimes—the most dangerous thing you can have is a one product, one service, one segment command. Likewise, it is almost as risky to move too far from your prime business.

An organization that develops and sells purification systems for semiconductor equipment manufactures, for example, can use the same expertise to develop similar systems for other firms requiring ultrapure liquids. The needs—while not the same—are similar. However, just because you have developed a program that works well for semiconductor firms, it doesn’t mean you can sell a slightly modified program to biomedical firms. Here is where your corporate strategy plan comes in, because you are able to identify targets of opportunity, strengths and weaknesses of the competition, market potential and trends.

Once you have that information spelled out, you will be in a position to determine how much it will cost to get into a new market, what your return on investment will be and when it will occur.

This examination also will allow you to see if the addition of the new products/ markets will help level out sales cycles, thus producing a more equitable and predictable cash flow.

If you’re going to diversify into new areas, you should be certain that you are going to gain a significant market share. To enter a totally new market with the objective of being able to penetrate only 1–2 percent of even a moderately sized market may not be worth the time, money and effort.

There may be a possibility of doing a technology or expertise transfer into a new market, thus keeping your research and development costs low. This is fine if there is a strong market potential available. If the market already has matured or is reaching its maturity, it becomes extremely difficult to enter as the new kid on the block. Often the “buy-in” costs are not worth the investment.

Finally, determine if new team members will be required. If you are looking to add a new layer of people overhead, the cost of market entry may be prohibitive.

At this stage you have all of the facts and figures at hand. If the project can be financed with retained monies, then you must sit down and evaluate the information. If you have to go outside for financing, then you have a professional presentation ready and are equipped to move more quickly.

Regardless of whether you are trying to determine where you are going tomorrow with your present company emphasis, or planning to enter prospective new areas, a strategy plan is necessary. Such a plan helps ensure that everyone in the organization is in agreement as to the posture and direction of the company. Equally important is the fact that your financial backers know where you are going and have the level of confidence necessary to support you in the effort. Putting the information down on paper is far from fun, but the rewards are well worth the effort.       

About The Author: G.A. “Andy” Marken is president of Marken Communications, Inc. in Santa Clara, Calif. He may be reached at [email protected].

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