Entrepreneurial Leadership and Management . . . and Other Stuff

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May
21

Business Planning – The Big 5

Brad Feld’s post on A Mental Model for VC Investments compelled me to write about something that’s been a hot button for me for some time – business planning.  What I mean by this is the process by which someone plans for the future of their business, whether it be for getting capital, selling the first product/service, growing, expanding, entering new markets, merging, acquiring or even liquidating.  Business planning is what is required to make reasonable strategic decisions for a business instead of day-to-day tactical ones.  It’s what makes luck a secondary or tertiary factor in success, rather than a primary one.  It’s the difference between leading and following.  It’s . . . you get the idea.

I’m not a venture capitalist (I’m unsuccessfully holding back the strong desire to add: “but I play one on TV”), but I do a fair share of angel investing.  In my role as an angel investor, I’m dumbfounded at how many business plans I see that have not been thought out much further than the introduce the product/service to market stage.  Often, even those that include a longer term view, miss discussing what is happening in the meta or micro-world around the proposed enterprise, completely ignoring all the factors outside the inner workings of the new company that will have an impact on it. 

In my experience as a board member of established companies, I’m even more surprised at how few know how to describe their businesses and outline a path to the goals that they’re trying to achieve.  In my experience, being lost without even knowing it is not the sole privilege of companies looking for funding.  There are plenty of ongoing concerns who are, basically, adrift.

OK, Will, stop whining and get to the point . . .

I believe that there are five key areas (The Big 5) that need to be addressed as a part of any complete business plan or business planning process.  There are no guarantees of success, of course, but by thoroughly understanding these items with respect to your company, you’ll have an excellent picture of where you stand and what you need to do.  They are:

  • Product/Service
  • Market
  • Differentiation
  • Channel
  • Competition

Product: What are you making or doing?  Don’t use jargon or buzz-words to describe it.  Explain it like you would to someone from another planet (like my kids).  If you can’t, or you can’t do it in a reasonable number of words, I’d be willing to bet that you don’t know what it is – in an exact sense, anyway.  Also, if there’s a team of people in charge of making the company successful, make sure that each person would give a virtually identical description if they were all moved into separate rooms and asked the question.

Market: Who are you selling to and why do they care?  Describe the need your filling, why it hasn’t been filled by someone else and the source of your customer’s desire or pain.  Make sure you understand what they need now and how that may change in the future.  You’ve got your own take on what’s going on, but also include what impartial observers say about what has happened recently in the market and its future prospects.

Differentiation: Being unique is the most important part of being perceived as a better alternative.  What makes you unique in your customer’s eyes?  Generally speaking, no company gets the free ride that comes from the intersection of market demand and being the only supplier.  You have competition (see below), even if you don’t think you do.  If nothing else, time is always your competitor.  You need to be able to describe, in detail, what makes your product or service different from those of your competitors and you need to do it through your customer’s eyes.  Without this, you can’t hope to effectively position your product/service or to outsell your competitors.

Channel: What is the interface between your company and your customers?  There are dozens of ways to get your product or service to market.  The one you choose is almost as important to differentiating your offering as the product/service itself.  Lesser solutions have become leaders as a result of intelligent channel and packaging choices.  Consider what the competition is doing, trends in how your customer is doing business, how your customer is organized (e.g. is the end-user buying or is a purchasing department making the purchase) and your customer’s budget – the more they spend with you, the more direct contact will likely be required.

Competition: In the broadest sense, what are your customer’s alternatives to where to spend their money?  Your competition isn’t limited to products/services that do similar things to what yours/you do.  Your competition is anything that can attract money from going your way in exchange for what you’re selling.  Your primary focus here, of course, should be products/services that are in a similar domain to yours (although be careful not to ignore the fact that often, your product can be displaced by a service or your service by a product – even one that addresses the customer’s problem in a different way).  Secondarily, however, you should explore the space of the wide range of needs that your customer has and the relative importance of their purchase of your product/service.  Always keep in mind that not doing anything is a often a reasonable choice for your customer.

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 May 21st, 2006  
 Will  
 General Business, Management  
   
 7 Comments

7 Responses to Business Planning – The Big 5

  1. I don’t disagree with your comments overall but I do think there’s a limit to how far in advance the startup can and/or should think about the business strategy.  The initial strategy needs to cover not only getting the product to market, but also how the product and company will evolve under plan A (where it’s reasonably well-accepted and growth needs to be pursued) or plan B (the company struggles to get traction – what strategic options will the company have?).  What is the plan for crossing the chasm and getting past the early adopters?  This sort of thing. But I think planning beyond that is a waste of time.  If the company is even somewhat successful, the landscape will be fairly different in three years, because either (a) established players will want a piece of the action or (b) they and other startups are already getting a piece of the action because it turned out they saw the same opportunity you did.  Consequently, the strategy, including very importantly differentiation, needs to evolve as the market does, and a three year timeframe is about as far out as you can think about it without just making idle guesses.

  2. I don’t disagree with your comments overall but I do think there’s a limit to how far in advance the startup can and/or should think about the business strategy.  The initial strategy needs to cover not only getting the product to market, but also how the product and company will evolve under plan A (where it’s reasonably well-accepted and growth needs to be pursued) or plan B (the company struggles to get traction – what strategic options will the company have?).  What is the plan for crossing the chasm and getting past the early adopters?  This sort of thing.

    But I think planning beyond that is a waste of time.  If the company is even somewhat successful, the landscape will be fairly different in three years, because either (a) established players will want a piece of the action or (b) they and other startups are already getting a piece of the action because it turned out they saw the same opportunity you did.  Consequently, the strategy, including very importantly differentiation, needs to evolve as the market does, and a three year timeframe is about as far out as you can think about it without just making idle guesses.

  3. Agreed.  In fact, three years is too long at the beginning or, probably, even as the company gets a bit more established.  I hesitate only slightly in that I often hear this as an excuse to forgo the planning process for any reasonable amount of time.  If you can’t explain the factors that will likely effect your business in the coming 18-24 months, the likelihood of your being overtaken by someone else is high.

  4. Agreed.  In fact, three years is too long at the beginning or, probably, even as the company gets a bit more established.  I hesitate only slightly in that I often hear this as an excuse to forgo the planning process for any reasonable amount of time.  If you can’t explain the factors that will likely effect your business in the coming 18-24 months, the likelihood of your being overtaken by someone else is high.

  5. Pingback: 2-Speed » We Don’t Need No Stinkin’ Business Plans?

  6. Every business needs a written business plan. Startups especially!

  7. Every business needs a written business plan. Startups especially!