I get to see a lot of business plans or Powerpoint presentations, and, when I review them, I find it peculiar how many lack one or several basic points that effect a strategic plan. First, let us define what is “strategy”: it is a profitable plan defined within a specific time frame that will state the method by which you will market a product or service and outmaneuver the competitive environment. This definition articulates word for word what should be a strategic plan.
By “profitable”, one assumes that whatever project you are starting must be profitable. If it is not profitable, why bother starting it? Now, an earlier blog discusses that the level of profitability is guided by cost of capital. Profitable also assumes that you are entering into marketplace for which there is a demand and, by all accounts, is a growing market. In other words, unless the market is growing and there is demand for it, why bother entering into that market sector?
To explain to the potential investor, profitable also means that you have detailed your sources and uses of funds in a standardized spreadsheet, which incorporates your costs and prices for your product or service. A strategy without spreadsheets is not a strategic plan. It is then a very risky speculative venture.
By “time frame”, the plan must articulate the chronology, generally for 3 or 5 years, that will execute the plan. Now I just took a look at a plan for a sporting clothing manufacturer that covers only one year – 2012. Great, but investors hang in there for the long run. What will happen in year 2013 or 2014? Further, a strategy covers several years simply because it will take into account the competitive environment, facility construction to match growth, scalability, office space, etc., over several years of operation. Then the numbers will be incorporated for those years as well. It also takes into account personnel — hiring, bonuses, office equipment, travel, or desks. I am not saying that the projected expenses will be accurate, but at least you are taking into account erosion in revenues. Then there is the economy of scale, where savings are gained from the uptick in production. One year is not enough. Investors want to measure your metrics – what is it that you are achieving over time. Heck, this business plan is an insult to any potential investor.
“Method” refers to how you are going to attack the market. Every company has a specific approach when it has limited capital to begin to achieve results. I just saw another business plan which stated that it was going to attack many market segments simultaneously — the car industry, vetenarian industry, dental industry, law industry, etc. For a start-up, I believe that is a daunting task. That company has to persuade me that targeting such a large market, with limited capital, is feasible. To me, method is important, because it addresses the credibility of the plan.
“Market” refers to the first year of business school definition –how will you get that product exposed to a customer and execution of the sale? The best engineered product in the world does not sell itself. Potential customers must know of the existence; otherwise, it lays fallow. Then one follows the 4 P’s of marketing and SWOT analysis. But this one plan I chatted about seems to have the 4 P’s but not the SWOT.
“Product or Service” refers to have an appropriate description of what the product or service is being sold. Believe or not, I have seen high technology plans where the product or service is not specifically described.
“Outmaneuver” the “competition” phrase refers to the fact that the plan must explain to the reader that you have acknowledged both vertical and horizontal competitors, both potential and actual. Now using the plan I recently looked at, the product was being sold in the clothing industry. How many clothing manufacturers are out there? The plan has no answer. It explains that it has focused on a specific market segment, but there must be actual competitors. Clothing has been worn by Cro-Magnon man. Yet, this business plan does not even recite one competitor. Potential competitors refer to the fact that shoe manufacturers can enter into the clothing space (e.g. Nike) (vertical competitor) and any decent plan must recognize the potential opponents in its space.
I recommend that any start-up writing a plan should follow the basics. These are fundamental ingredients to outline the strategy that cannot be ignored. Missing any component of just the basics will weaken any strategic plan.