Category Archives: Strategic Planning

The Strategic Plan

Small businesses are not scale models of big businesses; they are characterized by resource poverty and dependence on a fairly localized market. Their greater vulnerability to the consequences of a lack of focus stresses the importance of their strategic plan.

The strategic plan defines the company’s “competitive edge,” that collection of factors that sets the business apart from its competitors and promotes its chances for success. It requires a clear evaluation of the competitive business climate and an intimate knowledge of the market for the entrepreneur’s product.

The foundation for the strategic plan is a clear mission statement for the venture. Addressing the following questions can assist in developing this statement:

What business am I in? The answer to this question is not as simple as it seems. A good example of an industry group that failed to take a broader view is the railroads. If they had viewed their business as transportation rather than trains-and-tracks, then the airlines would be named Union Pacific and Illinois Central.

Who is our product intended to satisfy? What customer needs are being satisfied? How are these needs being satisfied, that is, by which of our methods or products?

An important strategic option is in how we price our product (as a price leader, value leader, or prestige product). Other options include the way in which we differentiate ourselves from the competition and the particular “niche,” or subset of the market, we seek to serve.

Once we have set internal objectives, we must examine the external and competitive environments in which we will be trying to achieve them.

The external environment consists of those factors that are largely outside our control, but affect the market for our product. Examples of these factors include general economic conditions, regulations, technological developments, and consumer demographics and attitudes. This environment is very dynamic, but some attempt must be made at projecting its changes.

Analysis of the competitive environment must begin with consideration of whether there are any barriers to the entry of a new competitor into the market. How strong is consumer loyalty to existing brands? How important are economies of scale; can a small independent firm compete? Are capital requirements prohibitive? Is there some proprietary technology that puts prospective entrants in a serious competitive disadvantage? Is access to raw materials or to distribution channels limited in some way? Are new entrants limited by permit restrictions or regulations?

The competitive structure of the industry is another important consideration. Are there a few dominant firms, or is the industry fairly fragmented? Will current competitors attempt to “punish” new entrants, such as through a price war, heavy advertising, or exercising their clout with key suppliers? Is there some geographic niche we can serve? What factors create cost advantages or disadvantages? How important is a firm’s position on the learning and experience curves? How are prices set? Is demand rising, even, or falling? Are there exit barriers that raise the risk of entry?

Relative strengths of our strategic partners must also be considered. What is the bargaining power of suppliers? How wide is our choice of suppliers? Is it costly for us to switch? Can our suppliers compete with us for the same customers? How important is our industry to our suppliers?

Do buyers have a wide choice of vendors? Can they make our product themselves? Are there less expensive or superior substitutes to our product in some segments of the market?

These are certainly not easy questions to answer, but performing the research to make better informed decisions, and addressing these questions “head-on” can improve our chances of success.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Taking Stock

Back when I owned an inventory-based business, one of my better customers had a clever barb in his repertoire. If we were out of anything he needed in his order, he would say “You know, this would be a great place to open a supply house.”

But supply, we did for 20 years on my watch. We were in a smaller market, handling about 10,000 separate items, so we enjoyed few economies of scale. We competed with some large distributors and did very well largely due to our focus on inventory control.

At the time we used integrated management software that included an inventory control (IC) module. What made our system work so well was our commitment to keeping accurate inventory on a real-time basis, which necessitated “cycle counting.”

Wikipedia.org defines a cycle count as “an inventory management procedure where a small subset of inventory is counted on any given day.” In our case, this meant that, instead of taking a physical inventory once a year, we counted 2% (one-fiftieth) of our inventory each week up to the fiftieth week of the year. Using this method errors are caught more quickly, and extra counts can be performed on error-prone items.

With that introduction, let’s talk about the steps you can take to get your inventory under control:
Evaluate your IC “infrastructure.” Are you ready to automate IC? If you are using a management software package, is the IC module adequate for your needs?

Is your inventory layout conducive to administering a “real-time” IC? Can your staff take on the extra duties involved? While getting such a system going can require a lot of initial attention, IC systems save time, by allowing you to know what’s in stock without having to go to the warehouse, by quickly detecting any possible theft, and by lowering rates of stockout (lost sales) and overstock.

Set a target for customer service level. Measures can include percent of orders filled completely, or percent of items delivered to items ordered. The primary constraint on reducing inventory is, of course, customer service level. What’s an acceptable service level for you? 95%? 99.5%? IC software generally uses such a figure to determine how much “safety stock” you need to meet this objective.

Learn industry norms to aid perspective. While it should seldom affect your behavior, it is “nice to know” what the industry norms are for businesses of your size. You can probably get these from your trade association, or go to the “Annual Statement Studies” by the Risk Management Association, or “Industry Norms and Key Business Ratios” by Dun & Bradstreet.
What if the industry norms are 90 days of inventory on-hand, and you only keep 45 days’ worth? What if you keep 120 days’ worth? No action may be necessary, but this gives you a greater context and perspective as you fine-tune your system.

Use “best practices.” Minimum overall inventory is not the end of the story. Ascertain whether a reduction is advisable. Even at a good overall level of stock you may still have many items out of balance, over or under. So our efforts should be about “best practices” that minimize quantities required, while raising the quality of your inventory.
Clean house! In my most recent turnaround consulting appointment, a plumbing wholesaler, we started by identifying all the items that our IC system identified as overstock. We went from thinking we needed more warehouse space to having about a third of existing space available.

Of course, much of it went straight to the trash heap, but some was recent enough to send back to the manufacturer. In between, we sold some at two garage sales we held, and donated the rest to a local housing agency.

Implement “Just-in-Time. “ JIT includes a set of actions that work together to squeeze slack out of your processes. Do you enter received material as soon as it arrives? Can your key suppliers commit to shorter lead times?

Zero-base SKUs. Take a hard look at the realistic contribution of every item in inventory. You may need to keep some losers as “service items,” but you will be amazed at how many of your items are break-even or worse.

Partner strategically. Can you narrow your number of suppliers by getting more items from the “majors?” You may currently split up orders to save a penny here and there, but the vendor left standing would probably meet or beat the other’s prices for a greater share of your business. More from each vendor means more frequent replenishment, and more opportunities for JIT.
These are a few actions that should apply to continuous improvement programs at most inventory-based businesses. As they say, “your mileage may vary.”

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Evaluating Business Planning Software

Abstract: Once a business idea is selected, it is highly recommended that we sharpen the concept by a detailed planning process. While this may seem a daunting task to first-time entrepreneurs, many “veterans” have found that there are software packages that can help to organize and format the material required for a comprehensive plan.

Once a business idea is selected, it is highly recommended that we sharpen the concept by a detailed planning process. The result of this step is a comprehensive business plan, with its major components being the marketing “mix,” the strategic plan, operational and logistical structures, and the financial proposal. The purpose of the business plan is to recognize and define a business opportunity, describe how that opportunity will be seized by the management team, and to demonstrate that the business is feasible and worth the effort.

While this may seem a daunting task to first-time entrepreneurs, many “veterans” have found that there are software packages that can help to organize and format the material required for a comprehensive plan. These packages are particularly helpful to those who are intimidated by starting from a blank piece of paper.

So is there a downside to purchasing software that has most of the text “in place?” The text is not always well-written, “fill-in the blanks” tends not to produce very fluid copy, and the parts you write may be in a different style than the words surrounding it. Some experts suggest that the real usefulness of such packages lies in the examples, when they are in a business similar to yours.

The sales leader in “plan-ware” is Palo Alto Software’s Business Plan Pro (BPP, paloalto.com). We have tried several packages that are comparable to BPP; you should evaluate a few to find which might fit your unique style best. Figure a price point of about $120 for standard versions of all. Others to consider would be:

 Planware’s PlanWrite (planware.org)

 PlanMagic’s Business (planmagic.com)

In addition to BP software, you may want to consider online services.

 Fundable Plans (fundableplans.com); $40 per use

Some of the factors that you would want to consider in your evaluation are:

User-friendliness – easy to get productive quickly; self-guiding, not having to go back-and-forth with instruction manual or help screens; “wizards available for some functions.

Interface – the package works with the other software that you will need in the process, such as Word, Excel, and PowerPoint.

Support – free technical support by telephone or email; useful help screens; program updates; and, resources such as articles and links that assist in the business planning process.

Features – functions beyond the basic “fill-in-the-blanks” templates, such as PowerPoint templates; market research data; industry codes; lots of rich examples; and, assistance with the more technical aspects of the plan, such as finance and strategy.

One of the dangers of using such packages is that your focus may shift from producing a complete and convincing plan to simply filling out the templates. Their real value lies in their support of getting it in writing.

Many entrepreneurs insist that their business concept is so clear in their heads that the written plan can be produced after start-up; this attitude “short-circuits” one of the major benefits of producing the plan. The discipline of writing a plan forces us to think through the steps we must take to get the business started, and, to “flesh out ideas, to look for weak spots and vulnerabilities,” according to business consultant Eric Siegel.

A well-conceived business plan can serve as a management tool to settle major policy issues, identify “keys to success,” establish goals and check-points, and consider long-term prospects. The plan must realistically assess the skills required for success of the venture, initially and over the long run, and match the skills and interests of the team to these requirements. Test the plan, and an accompanying oral presentation, on friends whose business judgment you value. Let them assume the role of a prospective investor or lender.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Used-Book Case Study

This is a case study to sharpen your skills at forecasting and break-even analysis.

Dwight Payne and Gary Heap reside in Santa Barbara, CA, where they attend college and pursue their mutual hobby of science-fiction book collecting. They pooled their book collection of over 4,000 volumes, and sci-fi magazines going back over twenty-five years. All neatly cataloged and indexed, they estimate it would cost $20,000 to assemble the collection today.

Payne and Heap decided that, at the end of this school year, they will dedicate the summer to getting a used-book store started in Santa Barbara as a means of supplementing their income year-round. Heap’s uncle owns a storefront near the University, and agreed to rebuild it as a used-book store. He also co-signed an inventory loan for $4,000 for some start-up working capital. In exchange he gets 25 percent of store sales for two years.

In addition, they bought a collection of over 10,000 paperbacks, magazines, and comics for $3,500, and some used shelving for $1,500. These purchases required borrowing the money from some fraternity brothers.

Provide business strategy planning advice to Dwight and Gary (There is no one right answer).

Decide on days of the week and hours the store will be open. Estimate staffing required and hourly salary costs. Do Dwight and Gary really work for free? What is a reasonable expectation of customers per day? Average purchase per customer? What are pessimistic and optimistic values of these estimates? How much will they have to spend on advertising and promotion to meet these estimates?

What will they pay, on average, for each book? How much can they get, on average, for each book?

Put together a projected (often referred to as pro forma) income statement. Relate the estimates developed above to monthly sales (pessimistic, expected, and optimistic), cost of goods, and expense amounts for wages and promotion. We should add 25% to wages paid for the payroll estimate, to account for taxes, sick days, etc. Debt service payments may be assumed to total $400 per month. Estimate rent and utilities and any other expenses that you feel might be incurred.

Conclusions: Find a break-even sales estimate, that is, the value for sales that produces a Gross Margin just equal to Total Expense. When gross margin generated equals expenses, profit/loss is equal to zero; this sales level is called the break-even point.

Would you do it if you were they? Why or why not? What kind of a test is this where you can’t look up the answer? It’s an entrepreneurship test; learn to be comfortable with your best estimate. If you are not comfortable with this seek consulting services for small businesses.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Using Break-Even Analysis

A significant advantage of some business ideas is that the venture can break even at what seems to be an easily achievable volume. A technique for quantifying that volume, called break-even analysis, examines the interaction among fixed costs, variable costs, prices, and unit volume to determine that combination of elements in which revenues and total costs are equal.

This article is drawn from our Entrepreneurship Knowledge Services series.

Fixed costs are those expenses necessary to keep the business open, and are not impacted by sales volume. They will include such things as rent, basic telephone expenses and utilities, wages for core employees, loan or lease payments, and other necessary expenditures. An entrepreneur should also include a living wage for himself/herself as a fixed cost.

Variable costs include those expenses that change as a result of sales volume. This can be a relatively simple relationship, as in cost of goods sold, where for example the variable cost of baked goods sold at a coffee shop is what we pay the baker for them, $0.30 each. Variable costs can also be very complex; for example, higher sales in one area of our business may increase long distance charges. Labor costs may be fixed for full-time employees, then, as sales increase, some overtime is incurred until additional personnel can be justified.

Generally, an initial break-even analysis focuses on a relatively narrow range of sales volume in which variable costs are simple to calculate. The variable cost in a coffee shop is simply the cost of goods sold. For a pizza delivery operation, it might be the cost of ingredients, and some cost allocated for operation of the delivery vehicle. A general term often used for the difference between selling price and variable cost is “contribution margin,” or the amount that the unit sale contributes to the margin available to pay fixed costs, and generate profit (we hope).

Now let’s take a look at how break-even analysis can be helpful to us. For this example, let’s assume we have determined that the level of fixed costs (salaries, rent, utilities) necessary to run a coffee shop on a monthly basis is $9,000. In addition, a cup of coffee that we sell for $1 costs us $0.25 for the bulk coffee, filters, and water.

The contribution margin of a cup of coffee is, therefore, $0.75. We can now calculate how many cups of coffee we have to sell to cover our fixed costs:

Break-Even = (Fixed Costs) / (Contribution Margin)

= $9,000/$0.75 = 12,000 cups of coffee per month

Let us say, further, that the fixed cost estimate was based on being open 6 days a week, 8 hours a day. This converts roughly to 200 hours a month, so we have to sell 60 cups an hour. This is a cup a minute for every minute we are open.

Does this seem feasible? Let us assume not, and evaluate some options.

(1) Cut expenses

Remember that we are still in the planning stage here, and experience has shown that prospective entrepreneurs almost always underestimate expenses. Let’s pass on this approach.

(2) Raise prices

We could plan on charging $1.25 per cup from the beginning, for a contribution margin of $1 per cup. The arithmetic is easy; to cover $9,000 in fixed expenses we need to sell 9,000 cups of coffee per month. The most important factor here is what the competition is charging.

(3) Broaden our product line

For the sake of clarity in demonstrating relationships between price, cost, and sales volume, we have considered a simplified version of how a real coffee shop might operate. The market severely constrains the amount we can charge for an ordinary cup of coffee, and a one product shop would have limited appeal. Perhaps we could also offer gourmet coffees, which cost us $0.50 per cup to brew, at $2.00 per cup. We could also offer baked goods, which cost us $0.30 each, at $1.30.

Suffice it to say that the break-even calculation now becomes a bit more complex, and outside what we are trying to accomplish here. Feel free to try it on your own.

This has been a very brief overview of how break-even analysis can be used in helping the entrepreneur better understand the relationship of the financial factors involved in measuring the feasibility of a proposed venture.

From a preliminary analysis of selling prices that the market will bear, prevailing costs, and reasonable expectations of sales volumes, the entrepreneur can avoid making serious mistakes and may discover significant opportunities.

If the business is feasible but beyond the entrepreneur’s reach the challenge becomes raising entrepreneurial capital.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Venture Research Service Provider

If you are considering buying or selling a service industry business you need to start with an evaluation. This can be very complex and the use of a venture research service provider can often give you a value that you can easily defend. The following article outlines the process, and is extracted from FBB Group Ltd: https://www.fbb.com/company-information/recentarticles/how-to-value-a-service-business.

Service businesses run the gamut, from accounting firms, to drycleaners, to janitorial services, engineering, public relations firms, and many other options. Despite their disparity, they all have one thing in common: offering a service to clients.

Valuing a service business involves many factors – a tidy, one-size-fits-all formula doesn’t exist. That being said, sellers should recognize that buyers will be particularly interested in certain characteristics for most service businesses. This, again, is where a venture research service provider can come in.

Normally, valuation is based on several criteria, including: history of profitability, cash flow, overhead, intellectual property, company reputation, number of years in business, opportunities for further growth and added profits, stability of key employees/management team, and customer diversification.

Crucial areas for valuation include intellectual property, ongoing relationships with clients, and having a good team in place – ensuring the company will retain its competitive edge, even when the seller (who typically drives new and repeat business) leaves.

Without significant capital assets, key customers and employees are critical. A strong management team adds to the value of a service business (often more so than in manufacturing) and, conversely, it can detract from value when there’s a poor or inexperienced team.
Another measure of value may include the amount of market share. Companies that provide a niche service and don’t have much, if any, competition will command higher multiples of value.

Cash flow is “king,” so the primary consideration for bankers is a buyer’s ability to stay current on loans for acquisitions and working capital. Banks focus heavily on reliable cash flow for service businesses, given that there is little, to no, collateral within the service business itself.

Whether you’re in the market to buy or sell, understanding the various considerations of valuation for a service business will make the process smoother and increase the probability of a more successful transaction.

Dr. Vinturella, has over 40 years experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site https://www.jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business. “ See https://www.jbv.com/8steps, available on Amazon.

Business Strategy Planning Advice

The following is excerpted from “Tips for Better Strategic Planning,” By Erica Olsen. It is part of the Strategic Planning Kit For Dummies Cheat Sheet, http://www.dummies.com/business/strategic-planning-kit-for-dummies-cheat-sheet/

Before you get too far into your strategic planning process, check out the following tips — your quick guide to getting the most out of your strategic planning process:

• Pull together a diverse, yet appropriate group of people to make up your planning team. Diversity leads to a better strategy. Bring together a small core team — between six and ten people — of leaders and managers who represent every area of the company.

• Allow time for big-picture, strategic thinking. People tend to try to squeeze strategic planning discussions in between putting out fires and going on much needed vacations. But to create a strategic plan, your team needs time to think big. Do whatever it takes to allow that time for big-picture thinking (including taking your team off-site).

• Get full commitment from key people in your organization. You can’t do it alone. If your team doesn’t buy in to the planning process and the resulting strategic plan, you’re dead in the water. Encourage the key people to interact with your customers about their perception of your future and bring those views to the table.

• Allow for open and free discussion regardless of each person’s position within the organization. (This tip includes you.) Don’t lead the planning sessions. Hire an outside facilitator, someone who doesn’t have any stake in your success, which can free up the conversation. Encourage active participation, but don’t let any one person dominate the session.

• Think about execution before you start. It doesn’t matter how good the plan is if it isn’t executed. Implementation is the phase that turns strategies and plans into actions in order to accomplish strategic objectives and goals. The critical actions move a strategic plan from a document that sits on the shelf to actions that drive business growth.

• Use a facilitator, if your budget allows. Hire a trained professional who has no emotional investment in the outcome of the plan. An impartial third party can concentrate on the process instead of the end result and can ask the tough questions that others may fear to ask.

• Make your plan actionable. To have any chance at implementation, the plan must clearly articulate goals, action steps, responsibilities, account abilities, and specific deadlines. And everyone must understand the plan and his individual role in it.

• Don’t write your plan in stone. Good strategic plans are fluid, not rigid and unbending. They allow you to adapt to changes in the marketplace. Don’t be afraid to change your plan as necessary.

• Clearly articulate next steps after every session. Before closing the strategic planning session, clearly explain what comes next and who’s responsible for what. When you walk out of the room, everyone must fully understand what he’s responsible for and when to meet deadlines.

• Make strategy a habit, not just a retreat. Review the strategic plan for performance achievement no less than quarterly and as often as monthly or weekly. Focus on accountability for results and have clear and compelling consequences for unapproved missed deadlines.

• Check out examples. Although you can’t borrow someone else’s strategy, you can find inspiration and ideas from the examples of others. Here is one website with a catalog of example strategic plans by industry: OnStrategy, http://onstrategyhq.com/samples/ . Check it out for quick access to ideas.