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Not All Business Growth is Created Equal

Following up on my post here yesterday about this being a good time for planning, I want to share this framework for looking at different kinds of business growth, in terms of capital costs and resources.

Take your possible growth efforts and classify them into the general categories shown in my drawing here to the right. Rate each growth opportunity based on two scales:

  • On the vertical, rate each growth idea by how new the product (or service, or business offering) is, on a scale of 1 to 10 with a 1 being your existing current stuff and a 10 completely new business offerings you’d have to develop.
  • On the horizontal, rate each growth idea according to how well you know the target market, from a 1 for your current business market to a 10 for completely new markets you’ve never worked with before.

Growth in the green quadrant, selling existing products to existing customers, is by far the easiest. That is viewed in terms of capital requirements, resources, investment, time effort, and so on. Growth in the red quadrant, creating new products for new markets, is way more expensive.

Growth in the two blue quadrants falls somewhere in between. That’s selling new things to existing customers, or finding new customers to buy existing things.

In practical terms, most businesses can finance that growth in sales of existing product to existing market through existing revenues, but most companies need outside support to develop new products for new markets.

The difference is often enormous. For example, a computer company studied 800 retail dealers over three years, and classified their growth drivers according to this simple model. Sure, this was all vague and rounded, and required a lot of educated guessing. What they found was that growth in the green quadrant costs about $0.15 in capital per dollar of increased sales. Growth in the red quadrant cost an average of $0.75 in capital per dollar of increased sales. Growth in the blue varied from $0.30 to $0.55 per dollar of sales growth. Those are old numbers in one special study, so don’t take them as still valid in dollars and cents; but they’re still true conceptually. What’s still true today is that some business growth is way more easily attained than some other business growth.

And I’m not talking about sales, or costs, or expenses here: I’m talking about new capital, as in new funding. I’m talking about either investment that dilutes your ownership, or borrowing that adds to your debt. These are tough trade-offs.

It doesn’t take a lot of math or theory to figure out why; we’re human, we make mistakes. It’s not just theory. Trying to develop new markets costs a lot more because we grope a bit, do it wrong, and learn the hard (and expensive) way. Trying to develop new products is also hard and expensive. I know software pretty well. We choose the wrong platforms, we try the wrong routines, we have to stop and go back sometimes. That all adds up to costs.

And then there’s the so-called rub. If you don’t move toward new products and new markets, eventually, you go stale and the business dries up. There’s a lot of paradox in business planning.

Conclusion: make sure you address existing customers first. You can’t keep a business healthy for too long without new products and new customers, for sure; but plan your growth well.

By the way, this isn’t just my idea, although I’ve seen the practical reality of this for several decades. It isn’t my original thinking. I heard it first from another consultant. I’m told this is the Ansoff Matrix model, which was originally developed at Harvard Business School.

Which Comes First: Plan or Pitch?

It’s not exactly the same as the chicken or the egg, but it has some similarities.

I get this question a lot lately, so I decided to take it here to my blog.

Don’t pitch a business without planning it first. That’s a lot like trying to film a movie without having a screenplay. You have to know what’s going to happen before you start.

And I do see people, websites, even some smart people and good websites, confusing the issue by presenting a pitch as if it were something you could do without having a plan. Sorry, bad idea.

Yes, you can summarize a business idea without detail. You can summarize a strategy. Maybe you can put up a picture of a business model, and focus on a target market, and narrow the business offering. And that’s certainly a useful exercise. But it’s just a concept piece, a rough sketch.

Before you have a pitch you simply must have a rough idea of estimated startup costs, sales, expenses, and cash flow. Without that you can’t possibly talk about scale, financial vital statistics, and feasibility. It’ s not that you accurately predict the future. It’s that without those basic numbers you really don’t know what the business is. They’re wrong, but they’re vital. They pull apart the relationship between sales, spending, profits, investment, and strategy. How many employees are needed? How much space? What kind of space? Does the marketing strategy match the target market and the focused business offering?

You should never, ever put a pitch in front of investors or bankers or bosses without having a plan behind it. Just ask yourself the questions your target audience will ask. Do you want to say “I don’t know” or “we haven’t figured that out yet?” Or would you rather say what your plan says.

And of course your plan will be a living, constantly changing plan. But don’t confuse flexibility with not having a plan. Flexibility is having a plan so you know how changing one assumption or variable effects all the others.

Special reminder: maybe a lot of the confusion is caused by people who think you don’t have a plan unless you have a full formal business plan document, coil bound, edited, printed, and mounted on a pedestal. Not so. Having a plan means milestones, basic numbers, task responsibilities, review schedules, and listed assumptions.

Final thought: my favorite process is having the plan — the real plan, not the formal output document plan — and working it interactively with the pitch. It has to do with the way we humans think. Summarizing something (the pitch) often sharpens the focus, and generates new ideas. Plan and pitch, interactively, working them both. And expect them to change almost daily. That’s life in the real world.

Which, by the way, is what I say in The Plan-As-You-Go Business Plan. (Sorry, I couldn’t resist).

(Image credits: Veranis, Archman/Shutterstock)

Don’t Underestimate Beachhead Strategy

I like beachhead strategies. The term comes from military strategy, meaning that as you invade enemy territory, you need to focus your strength and concentrate on winning a small border area (the beachhead) that becomes the stronghold from which you’ll advance into the rest of the territory.

imageThat’s what the allies did, successfully, in the D-Day invasion of Normandy in 1944. That military success was planned and led by Dwight D. Eisenhower, author of my favorite business planning quote (“The plan is useless, but planning is essential.”) It’s what you see in the opening scenes of Saving Private Ryan. It’s also something I learned mostly by playing war strategy games (although not specifically the one shown here; that’s just a good illustration).

And it’s good business. In business, particularly startups, the beachhead strategy is about focusing your resources on one key area, usually a smaller market segment or product category, and winning that market first, even dominating that market, before moving into larger markets.

Beachhead strategies are often critical for bootstrapping new businesses. And franchisor businesses should think of the beachhead strategy as making sure the initial locations are strong and successful and good models for future locations.

Sadly, people don’t always communicate beachhead strategies well. As an angel investor, and judge of business plan contests, I often see what should be beachhead strategies looking instead like they are focusing too narrowly and missing the larger markets that the beachhead will lead to.

It’s ironic. In business pitches, for startups, the beachhead strategies tend to generate criticism from judges, experts, and other assorted experts for being too narrow, too focused. They want the big picture. But, on the other hand, the big picture, do-everything strategies will often be criticized for being unrealistically ambitious, and unrealistic.

The answer to this seeming paradox is: If you are doing a beachhead strategy, make sure that you include the follow-up idea of broadening your approach later on, after establishing yourself in that first core market.

(Image credit: hoping the game publishers don’t mind seeing their cover shot here; I got it from images.google.com)

— Late addition

My friend John Reddish added one of the comments, mentioning the pictures of Normandy he sent along to add to this post. Here they are belong. Image credit, John Reddish:


Business Plan Contest: You Be the Judge

Five very interesting young businesses, five excellent presentations, six judges with questions, and all of it available as online video, where you can watch the whole thing and vote for the winners.

What I like best about the Forbes annual $100K Boost Your Business contest is that it is open to everybody. I love being a judge of that event. And I also love that you can be a judge too.

This is also a good opportunity to see good examples of the classic 10-minute slide pitch to investors.

I’ve already voted. Now it’s your turn. Here’s the link (or you can click on the image):

Boost Your Business Finalist Voting 2009

forbesvote2009

One Problem with Entrepreurship Education

I’m not saying this is the only problem. And, by the way, I’m in favor of entrepreneurship education, when it’s done well. I think it helps … but that’s another post.

It’s a simple story. It’s a real problem with business education concerning entrepreneurship in top institutions. It happens way too often. Not that it’s the only problem with entrepreneurship education, but it’s harder to spot.

Take an imaginary person named Leslie who’s interested in entrepreneurship and wants to study it and then teach it, as a career. Here’s what happens.

First, she enrolls in a good graduate school intending to get a doctorate degree. In business grad schools, the MBAs study for two years to get jobs in business, not to teach business. Yet it takes a doctorate to teach business in a good school, as a career. Yes, there are exceptions to that rule, but Leslie is focused and motivated so she wants the best path to the best career opportunities, which means she needs the PhD degree. That’s a matter of academic records, standardized testing, essays, and recommendations, pretty much the same process people go through to get into college or university.

As she gets used to her studies and the general path to doctorate and teaching career she discovers, within the first year or so, that the academic study of business divides itself into standard groups; marketing, finance, operations, and so on, that don’t really include entrepreneurship (yet). And those functional divisions have generated a small set of academic journals, fewer than the fingers on one hand in most cases, that control her future. And the system of rewards and such within the small world of doctors of business is shockingly (to Leslie) well defined. Here is what she finds out:

  1. She can’t get the doctorate without a thesis.
  2. She’s not going to get into the upper echelon she wants for her career unless her thesis is published by one of those academic journals.
  3. And those journals focus on the standard specialties: marketing, finance, operations, etc. Not entrepreneurship.

Result: if she’s ambitious, Leslie drops the focus on entrepreneurship and moves over to finance or marketing or something else that’s more established within the academic hierarchies. And you, dear reader, can go from there to the other logical conclusions.

Think about the impact on education in entrepreneurship at the big business schools. Maybe it’s a good thing because it means more real-world entrepreneurs teaching, even if they’re normally adjunct instructors instead of professors. And maybe it’s not so good because it relegates entrepreneurship and the study of entrepreneurship to a lower rung on the career ladder. I don’t know.

If you’re out there in academia, reading this, and I’ve got it wrong, please tell me. I’ve had a chance to watch how this works. I haven’t been down this path myself, but I’ve been an adjunct instructor for a few years, teaching one class per year at the University of Oregon.

(photo credit: lynnlin/Shutterstock (modified by me))

5 Kinds of Trolls Hiding Under Business Bridges

You could call this post the taxonomy of trolls. I thought there were fairy-tale creatures, ugly and mean, living under a bridge, interfering with innocent travelers. It turns out, though, they’re real. Just like in the three billy goats gruff fairy tale, they are hiding along the way, jumping out to cause trouble.

I like puns and I like the potential double meaning with trolls. First there’s the beast or character of the troll, like in the fairy tale. And then there’s the verb, trolling, which I think of from 50 years ago when my granddad took me fishing. We’d put the baited hook into the water and move the boat slowly, trolling for fish.

I’ve happened upon several kinds of trolls in business. Maybe you’ll recognize some of these. Better yet, maybe you can avoid them on your travels.

  1. Patent trolls. They buy up rights to otherwise useless or abandoned patents and hoard them until they can spring them on unsuspecting businesses. The mere threat of legal action is worth lots of money these days. Do you think it’s coincidence that the vast majority of patent troll lawsuits are filed in a single county in Texas? I don’t. I think that county has developed a symbiotic relationship with patent trolls. Encourage the trolls, get the revenue. The problem is that technology overwhelmed the government so much that the patent system couldn’t keep up with it. A lot of bad patents were issued. They become opportunities to quasi-extort money from innocent companies. These are double trolls: troll creatures (noun) who troll (verb) for opportunities.
  2. Idea trolls. Seth Godin posted Trolls last week, referring to people who “gain perverse pleasure in relentlessly tearing you and your ideas down.” It made me feel better to see that even he – because I so admire his work — gets attacked by trolls. He said:
    1. trolls will always be trolling
    2. critics rarely create
    3. they live in a tiny echo chamber, ignored by everyone except the trolled and the other trolls
    4. professionals (that’s you) get paid to ignore them. It’s part of your job.
  3. Politics-as-business trolls. I don’t mind political opinions, particularly not in blogs, but I do get annoyed by people whose approach is as a small business expert who has dipped their business expert brand into political mudslinging. The right-wingers who object to everything the government does as bad for small business, or the left-wingers who applaud everything the government does as good for small business. I hate the way they hide their politics in business terms.
  4. Social media trolls. Talk about explosive growth—how about the growth in social media trolls. These two are trolls as creatures, but they’re also trolling around, looking for opportunities. Like the people who use Twitter or Facebook as media for selling things to people they don’t know, who haven’t asked; now that we’ve interacted in Twitter, will you tell your company to buy my product? Not to mention the annoying recent development of people selling things by tweeting with my Twitter name “@timberry” with a Web address to go to. I hate to think what some unsuspecting person gets if they go to that link. And it’s not like they’ve interrupted my account or done it as me; they just put my name in the sentence. Bummer.
  5. Trade-show trolls. This is another double-troll situation because these trolls troll the trade shows catching the poor people behind the tables, staffing the booths, making them exposed and unable-to-escape victims of unwanted sales pitches. And the double-troll-trouble gets doubled again –- maybe that’s cubed – because the companies who pay for exhibition space become victims of trolls who didn’t pay for space but troll for sales victims anyhow. My particular favorite (not!) are the ones who want to sell competing goods or services.

(Photo credit: by John Bauer, via Wikipedia)

3 More Questions About a Business Plan Writer

I posted 10 questions on this topic last week.  Today I have three more, on the same topic.

It sounds attractive, doesn’t it? Get a business plan by hiring somebody to do it for you? I can see how you’d think of that as division of labor, like hiring an expert to do design, or programming; have an expert do a plan. And you can do that, if you’re careful; but you really have to understand the underlying management questions, what you’re getting, and what you want.

Still, here are 3 more questions:

  1. What would you estimate to be the hourly rate of somebody with business experience, financial knowledge, and computer knowledge to do a competent business plan?
  2. How many hours would you expect that person to take?
  3. What would you get if you multiplied that hourly rate question by the number of hours question?

I don’t know about you, but I’d estimate $200 or so per hour for that first question. It would depend on the market, and the specific person, but we’re probably talking about MBA or CPA. I’d say 20-40 hours for the second question, although that depends too, on other factors. And for the third question, multiply $200 times 20 hours and you get $4,000.

So what are you planning to pay that business plan writer?  And how is it that I see business plan writing advertised for a few hundred dollars? How do they make money like that? And if the plan writers’ prices are that cheap, is the plan quality cheap as well?

(Photo credit: Artem Samokhvalov/Shutterstock)

10 Questions Before Hiring a Business Plan Writer

No, it’s not that I have anything against business plan writers for hire. I spent some years doing that, although I never just wrote the plan; I always facilitated and translated and coached planning. (Unless, of course, you’ve read my post on my worst business plan engagement, in which case you’ll know I’ve used “never” and “always” wrong in the above).

  1. If you wanted to get your body in shape, would you hire somebody else to eat better and exercise regularly?
  2. How would you feel about sending somebody else to the doctor to be examined to determine your health?
  3. How do you feel about pre-packaged vacations?
  4. What would you tell your ghost writer? How long would that take you? Could you type that out, maybe? Could you do it in YouTube?
  5. How will you deal with questions that come up, after the plan is done?
  6. How much good will a single one-time plan document do you?
  7. What will you do about revisions later on? Will you just accept a plan done once, and never revise?
  8. How long would you estimate is the average shelf life of a written business plan, before it begs for revisions?
  9. What would you do about regularly reviewing and revising a business plan that some outside business plan writer had written?
  10. How would you get a team of people committed to a business plan that an outsider wrote?

(Photo credit: Linn Currie/Shutterstock)

FTC vs. Social Media Wolves in Sheep’s Clothing

Here I was writing this post about new FTC rules for social media, feeling self-righteous about it, when it occurred to me that Shutterstock.com gives me a free stock photos account, which I use to illustrate this blog. And I’m an Amazon.com affiliate. I accept review copies of books, some of which I’ve reviewed here (although I bought most of the books I’ve reviewed, and I don’t go around asking for review copies, just accepting them, occasionally, when they’re offered). And I’m an employee of Palo Alto Software. So I don’t want to be a pot calling kettles black. Or a wolf disguised as a sheep.

Still, it’s about time. A new Federal Trade Commission (FTC) ruling aimed at blogging and, I assume, Twitter starts Dec. 1. This is from the New York Times story on it:

Beginning on Dec. 1, bloggers who review products must disclose any connection with advertisers, including, in most cases, the receipt of free products and whether or not they were paid in any way by advertisers, as occurs frequently. The new rules also take aim at celebrities, who will now need to disclose any ties to companies, should they promote products on a talk show or on Twitter. A second major change, which was not aimed specifically at bloggers or social media, was to eliminate the ability of advertisers to gush about results that differ from what is typical — for instance, from a weight loss supplement.

I’m glad they made it specific. I hope they enforce it. The same general idea was previously built into basic journalism ethics and it should have been obvious that it applied here as well. Ethics? I mean what do you think, when people are paying people to blog about their products, tweet about them, and do reviews on social media sites. Making endorsements look like honest opinion, or reviews pretending they’re objective, is ugly. I hope it’s obvious why.

What if some company offered to pay you under the table for talking it up with all your friends? How would you feel to be a walking talking advertisement parading as a person?

But it happens all the time. I got an email last month offering me money to endorse products on this blog. It was blatant and unembarrassed. The offer to shill for money was couched in terms like “business models” and “revenue streams.”  But it was pretty simple: if I would endorse products in my blog, they’d pay me. No, thank you.

Time magazine’s last issue included a story called Brought to You by Twitter, about tweeting for money:

A company called Izea, which made its name connecting bloggers with firms willing to compensate them for plugs on their blogs, has set up a similar service for the Twittersphere. At a site called Sponsored Tweets, Twitter users can sign in, set the price they want companies to pay them for tweeting an ad on their behalf and wait for the offers to come in. Jocelyn French, the mother of a 2-year-old boy and 1-year-old girl, has tweeted for a parenting website, a college-information site and Kmart, among others, at $1 a pop. “I figure, hey, why not get paid at the same time?” French says. On average, companies are paying Sponsored Tweets users $29 per tweet.

I hope you see the problem with that: first, it’s dishonest, the wolf in sheep’s clothing, because it’s presented as conversation.

Back in the 1970s when I studied Journalism in grad school, the generally accepted ethics were pretty obvious on this. Disguising ads as editorial was clearly out of bounds. But that was way before Amazon.com revolutionized consumer reviews, and then there was the proliferation of blogs and now Twitter blurring the boundaries. But still, put it back onto the personal level: if a company pays you to pretend you’re giving a legitimate personal opinion, that just doesn’t feel good. Right?

(Photo: Sarah Heinman/Flickr)

Step-by-Step Online Video on Business Planning

The business.gov site has posted my business plan tutorials, a collection of 13 videos covering business planning for real businesses. We’ve been working on this since last Spring, and I’m very happy to see it done and available now. I’m grateful to the team that put it together for me.

And I’m also happy to say it covers both the formal business plan and the more practical modular business planning as a management tool. This support is not just for businesses that need to show somebody a business plan document, but for all businesses. It’s planning as management, like steering.

Sections discuss on how planning is modular, and form follows function, and planning is management, it points to the more practical everyday management use of business planning. There’s also a section on the Heart of the Plan, which is strategy; and another on Flesh and Bones, which is the core elements of dates, deadlines, task responsibilities, and basic numbers.

I’m very pleased to be included in the business.gov site, which seems to me to be a very timely new effort to consolidate the government’s offerings to small business into a single site that also operates as a community. 

If you’re at all interested in business planning, whether or not you need a business plan document to show to outsiders, I hope you’ll drop by the tutorials page at business.gov/start/business-plan-tutorials.html. It was a lot of work, for me and the team at business.gov that put it together, and I’d like to think it’s very useful. You don’t have to go start to finish in order, either. If you have just four minutes to spend, click on the “Form Follows Function” link. That’s my personal favorite.