Platt Perspective on Business and Technology

Planning for and building the right business model 101 – 7: implementing a business plan 3

Posted in startups, strategy and planning by Timothy Platt on April 22, 2015

This is my seventh posting to a series that addresses the issues of planning for and developing the right business model, and both for initial small business needs and for scalability and capacity to evolve from there (see Business Strategy and Operations – 3, postings 499 and loosely following for Parts 1-6.)

I first began discussing business plans and their implementation in this series in Part 4 and Part 5, and continued that in Part 6 where I briefly touched on some of the issues of:

• How to build both structure and flexibility into a business plan,
• And on how to know when and where it might be necessary to rethink the business plan and turn to a new contingency scenario approach for dealing with some portion of it.

I briefly made note of a couple of potential scenarios in Part 6 that might easily fall outside of the range of contingencies that the plan might realistically start out including, and where pursing an alternative Plan B approach might be required for updating at least some specific section of that blueprint plan. But rereading that posting, I have decided to flesh out my examples portion of that posting with more detail as to how a need for rethinking and re-planning might become necessary. And I do that by fleshing out in a bit more detail, an example scenario that I initially briefly raised in Part 6:

• You are building a new business with a goal of manufacturing specific complex subassembly components for cars, as part of the automotive retail after-market, and for both customization upgrades and for more standard repair and maintenance work.
• So your new business has to be able to produce precise fit, functionally compatible complex automotive parts such as custom high performance carburetors that you can sell to wholesalers and to auto repair and related retailers, and at prices that are competitive to those asked for by those cars’ original manufacturers for their parts.
• And your business would directly manufacture essentially all of the strictly mechanical component parts to your end-products that you would bring to market, but you determine that it would be more cost-effective for you to purchase at least select non-mechanical components that you would require in order to keep your business focused on its core capabilities and strengths. In the case of carburetor manufacturing this means purchasing custom design air and fuel flow control electronic circuitry: the specialized computer circuit components that your new carburetors require to function efficiently, that coordinate how the more mechanical parts in them work. So you find and vet and enter into a long-term contractual supply chain agreement with a trusted reliable specialist provider that has both the hands-on expertise and the specialized manufacturing resources needed to produce these electronic control components. And both you and that company’s owner enter into this agreement with a full intention to honor the terms of this agreement and you build your business model with this agreement and this type of key parts sourcing built in as a given.
• Then the building next to this partner business’ main production facility burns down and their facility is very heavily damaged too, curtailing their ability to meet any production quotas and in fulfilling their contract with you and your business, or for meeting any other production and sales agreements that they have entered into either. And it is absolutely certain that they will be out of business for a long time, if not permanently – where you as a new business owner have to be able to fulfill your contracts to manufacture and deliver your products, and now. And as a new business, it is vital that you start out proving your capabilities to produce and on time, so you can build from a reputation of reliability.
• And now you have to both find a new key parts provider to address this gap and you are likely going to have to face significantly higher per-part costs if you do this quickly enough to even come close to meeting your immediate first round sales agreements.

I have in fact seen what amounts to essentially this precise scenario play out, complete with a building fire that spread and with damage from that event itself, combined with water damage from putting it out. When you predicate a business plan on an assumption that you are certain to have specific ongoing supply chain service and support from one particular collaborating business, that might or might not make sense. I simply note that this type of gap, based on less than fully considered assumptions can arise and even for experienced business planners and entrepreneurs. In this scenario and for purposes of this series it did happen, and now you as that planner and entrepreneur have to deal with the consequences.

• Can you simply expand out an area of your original business plan’s operational planning, in effect turning a briefly stated checklist-point assumption into a more detailed sub-plan, and with alternative contingencies formally included as needed so you can more fully understand and manage the ripple effect consequences?
• If you seek to do this, what ripple effects from this now-required change would you face and with what priorities for addressing them? Start out assuming that anything like this change will affect other parts of your overall planning (e.g. your financials section) and that this will necessitate at least some explicit rethinking and rewriting to keep your overall plan relevant. And assume that you will be reworking your plan while you are making these changes and carrying through on it.
• How can you proceed so as to keep your basic organizing plan as much in place as possible, and both to benefit from the energy and effort that went into it, and to reassure others who might be participating in this venture – backers and potential backers included, and potential customers of course, that your business is not going to be stopped by this event? Here, assume that these new high performance carburetors constitute a flagship product for your new business, and one that would be expected to lead you to cash flow break-even and to your initial profits generation too. Do you have to change your priorities as to what product types you would focus on producing and selling first, and only pursue custom carburetor production and your potential customer base for them later?
• You cannot make effective decisions here if you do not fully understand the consequences of your options that you can chose from, and you are probably not even going to see your full range of options and the trade-offs they entail if you do not do this systematically, and according to a consistently considered business plan.

I leave off that discussion here with those questions and points, rounding out and completing my Part 6 discussion with them, simply noting that when you have to reconsider your basic business plan you probably have to do it quickly and as you proceed with at least some sort of Plan B. And I also note in that context that it is always important to systematically review how big a forced change would be and how it would impact on all of the working parts of your newly redrafted business plan as a whole, so as to limit avoidable ripple effect inefficiencies and limit damage if nothing else.

And I turn here to the issues that I initially intended to focus on in this installment:

• Bricks and mortar, online, and combination businesses, and how business plan development and execution can differ between them.

In anticipation of that, I noted that I would discuss the issues of product and service focus, and that I would do so at least in part in terms of capital investment and related fiscal considerations. And I added that I would do so with the fuller business process cycle in mind.

I begin this by noting a few details of the sometimes cartoon images of bricks and mortar, and of online stores, and certainly as they are compared to each other.

• A bricks and mortar storefront requires a physical storefront space, and with both hands-on sales and support staff on site there and with inventory in place, stocking it shelves. And this means buying or renting that physical space and paying for any renovations and redesign needed to bring it up to standards as meeting your business needs and according to your business branding if you are moving into any preexisting structure. And on top of this, holding and using this space means accepting and paying utility bills and insurance bills and accepting a range of other, bricks and mortar-specific expenses as well.
• Online businesses do not require a significant portion of that type of capital intensive physical asset in place, where all sales and support work can be carried out from simpler, lower cost and generally smaller locations – and even from multiple distributed locations where that would make sense. This can and often does mean office space that is located in industrial and other areas that customers would not be likely to want to go to, where costs per square foot are much lower than you would find in more attractive retail-supportive addresses.
• And if inventory warehousing is kept to an absolute minimum through just in time acquisition processes that are geared to meeting more immediate sales needs, physical facility and related needs and expenses can be kept to a pared down and very modest minimum, and with a minimum of business value held actually having to be tied up in less immediately liquid forms such as warehoused inventory (see my series: Understanding and Navigating Burn Rate: a startup primer, at Startups and Early Stage Businesses as postings 67-78 for Parts 1-12.)

First of all, a bricks and mortar store can pursue just in time inventory management approaches too, limiting and even eliminating outside warehouse requirements. But more importantly from the perspective of this discussion, a strictly online business is in most cases going to require a much more complex and comprehensive computer and internet connectivity and support system than a strictly bricks and mortar operation would, and certainly when the later only operates a standard off the shelf technology web site and delves into social media strictly for marketing purposes to help bring people into the store itself.

• This means that in practice, the savings suggested in my three point list as just offered above can be deceptive, with online business operations offering some very genuine savings, but with some of the overall expense requirements faced simply redistributed rather than removed.
• Bricks and mortar businesses might have higher expenses in some areas but so do online businesses and the overall costs are not necessarily going to be all that different and certainly as these businesses scale up and as online businesses require more costly customized information technology solutions if they are to stand out from their online competitors.

Building and pursuing the right business plan in this context means building there to manage the cost-effectiveness of everything done, and regardless of where your cost centers are going to be in your business. And if you seek to pursue a hybrid business model with both bricks and mortar and online components, you need to do so from a business plan that can capitalize on the potential synergies that this can bring, limiting if not entirely avoiding having these two arms of your one same business in effect competing with each other and wasting your resources as a result.

I am going to look more deeply into bricks and mortar, and online businesses and business models in my next series installment, and will delve into some of the issues of building and running a hybrid model business for this too. Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 3 and also at Page 1 and Page 2 of that directory. And you can find this and related material at my Startups and Early Stage Businesses directory too.

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