Platt Perspective on Business and Technology

Building a startup for what you want it to become 23: moving past the initial startup phase 9

Posted in startups by Timothy Platt on April 26, 2017

This is my 23rd installment to a series on building a business that can become an effective and even a leading participant in its industry and its business sector, and for its targeted marketplaces (see Startups and Early Stage Businesses and its Page 2 continuation, postings 186 and loosely following for Parts 1-22.)

I began discussing new businesses that have just entered into a state of achieving consistent if perhaps still modest profitability, and their first early growth phase in Part 22, there focusing on three characteristic if somewhat stereotypical business model approaches which I identify as following:

• A conservative business model,
• A normative business model, and
• An aggressive business model.

My focus of attention there was on how these types of businesses variously approach issues of volatility, and with a focus in that on how supplies of externally sourced resources are secured, as a working example of an area of possible concern as would apply in a standardized manufacturing or a more custom production context. Note: this does not necessarily mean large scale or assembly line production, and for a new young business it probably would not and certainly at first. It simply means developing and selling product offerings that are constructed and assembled in this new business, for sale through a market to end-user consumers or to other manufacturers for use in their products.

I specifically addressed the conservative and aggressive models in Part 22, leaving consideration of the more normative business model approach for here. And I will in fact significantly focus on that in this posting’s discussion. But before doing so I want to continue, and for now at least complete, my discussion of the first two business model options under consideration here, as well as offering some more-general comments that would address all three of these approaches.

First of all, it is important to note that while externally sourced resources such as raw materials that would go into finished products, are essential for the ongoing performance of a manufacturing business and are of vital concern there, they do not constitute the only possible sources of volatility that have to be considered by those ventures. I also made note of volatility in marketplace interest in what is offered and of sales potential in Part 22 too, and the market face of volatility. But even with that added into consideration, market-sourced and supply chain and resource acquisition sourced volatility combined do not even begin to fully address the possibilities here.

Let’s set aside considerations such as change in law or in outside regulatory constraints here, as a new business is not likely to have developed consistent processes or practices under an older system. This area of consideration might still be important if the founders and managers of such an enterprise have developed their business model in its specifics with regulatory, for example, assumptions build into it that will perhaps suddenly no longer apply. But let’s set this source of potential volatility aside here at least for now and consider other additional possibilities. And with that, I turn to consider new businesses that would operate in innovative industries and that would seek to meet the needs and demands of a marketplace that demands change and invention and on an ongoing basis – as applies in a wide range of consumer oriented technology-provider arenas.

• For a rapidly changing innovative industry in particular, the most important driver of volatility level and risk for a business, and particularly for a young one with still-limited financial resources, can come from disruptive innovation as it might arrive to market from a competitor.

New businesses, in general seek to devise and offer new sources of value, as value would be seen by potential markets and customers, that would set them apart from their competition. Novel and even unique niche defining value of this type creates opportunity to grow and succeed. But this often means new businesses seeking to fulfill an unmet need that others might also be trying to build and market and sell to as well. What happens if a young company suddenly finds that its new business defining source of value is not going to be as uniquely defining for it as they wanted or planned for it to be? What happens if this degradation in realizable opportunity arises before they can develop a strong first mover, name advantage as a known and hopefully preferred source of what they offer, as their consumer facing new source of special value?

• Volatility and the risk (and opportunity) that it can engender can take a variety of forms, and some of them are both predictable and industry-dependent, or at least dependent on a predictable pace of change that an industry and its markets operate in. But even then, volatility can arise unexpectedly and certainly in any actionable, specific incidence detail too. So it is vitally important to think through where this type of overall categorical challenge can come from, and from all possible anticipatable directions.

The second more fundamental, general point that I would explicitly address here in this posting is the simple fact that it is young businesses that I am holding under consideration here, with limited financial resources: liquidity and reserves, and limited performance track records that could be cited as sources of surety of more likely positive performance ahead. I have at least touched upon the cash-available, liquidity side of this in Part 22 and here in this posting as well, and on how a lack of buffering reserves creates risk in and of itself. Limited track records can create parallel risks, and ones that might only be partly off-set by the personal reputations and work histories of the entrepreneurs who are building this venture – and particularly if they are young entrepreneurs who seek to move from more hands-on and low-level management positions in larger organizations to ones of stand-alone, independent business building.

So I begin the main line of discussion of this posting by expanding out the basic set of issues addressed in Part 22. And with that in mind, I turn to consider the more normative business model – which I position here as taking what can be considered a mixed-strategy approach in picking from the conservative and aggressive business model approaches for what would hopefully be a more effective blend.

First, let’s consider those externally sourced resources again, and raw materials and preassembled, third party components that would go into a normative business model enterprise’ own finished marketable products. I wrote in Part 22 of how a conservative approach would more likely lead a business to storehouse at least essential supplies of this type, as would be fiscally prudent, in order to insure their being able to maintain their own production lines – and certainly as they are just getting started and trying to prove themselves to their markets, where any gaps in their production would raise grave concerns as to their reliability. Conservative here, would mean their holding larger overall production input reserves of this type and particularly if the owners of such a venture felt any real concern regarding their supplies availability. An equally still cash-strapped aggressive model business would push this envelop much more towards taking a just in time approach to supplies acquisition and management.

For small, young businesses this might only involve small levels of supplies inventory acquisition and storage and regardless of which of these three basic business models is being followed, and certainly when compared to what a more established larger enterprise would face and even when both new and established pursue what is in principle the same business model approach (e.g. a same basic lean and agile approach.) But that point of comparison and the overall levels and monetary values of stocked materials held at any given time are not important here; what is, is that the level of manufacturing raw materials invested in and held at any given time can represent a challenging scale of investment for any new young business as it seeks to allocate its resources and risk faced – and sometimes even for one pursuing a more just in time approach too. The proportion of potentially available overall liquidity is the more important consideration here. And lean liquidity is after all, lean liquidity.

• What would the normative business model approach dictate here? Answering that begins with asking a series of basic due diligence questions, and ones that the owners and senior managers of such an organization would focus upon in their planning.
• What are the sources of volatility faced and what are their priorities?
• Priority determinations for this would be arrived at on the basis of an analysis of the likelihood of specific problematical events arising and an analysis of their likely cost-impact if they do, and according to a single unifying standard scale: arrived at by multiplying likelihood probabilities of occurrence of possible adverse events, by likely costs if they do arise. And as this involves significant potential unknowns and for both of these basic factors, a prudent approach for implementing this would be to develop best case, worst case and normative analytical risk management models here and to choose which to assume here on the basis of the overall level of risk that would be considered acceptable for the business.
• Supplies acquisition and use would certainly be included there for any business that seeks to manufacture and bring to market their own products. What areas of their production supplies input would best be managed more conservatively and where would a more aggressive approach make the most sense? Volatility in supplies availability for certain types of input resources might dictate pursuing a more conservative course there, while ready reliable and even contractually guaranteed availability might dictate a more aggressive one, and certainly if the range of available sources for these resources was steady and similar across both of these areas of resource acquisition and not a defining factor that might also distinguish between them and when they might best apply.
• But switching directions in this narrative to add in a critically important business model parameter, I repeat a crucially important point that I made in Part 22, but that I did not elaborate upon there. Conservative in this does not necessarily mean building for reduced overall risk, and aggressive does not necessarily mean building from a more risk accepting and risk tolerant perspective, and it does not necessarily mean accepting more of it – even if that can be the case when making specific comparisons between specific businesses. The real distinction here can in fact simply be one of where the risk that is accepted, is accepted in the business’ overall operational systems. Here, would risk be best accepted in the form of reduced liquidity with its consequences, in order to better safeguard here-and-now production line continuity, or would it be best accepted in the form of allowing for greater risk there in order to safeguard liquidity levels – that would now be more readily available to meet other business needs? This is where business planning has to be comprehensively inclusive and take into account all anticipatable factors.

Normative business models are explicitly developed around that understanding and with a goal of intelligently managing and reducing risk on a functional area by functional area, and a process system by process system basis – and with overall risk reduction added in there where it can be. And this is also where timing constraints can become vital – and the pace and timing in which positive opportunity and business success, and risk and loss might arise. A normative business model is also built explicitly around recognizing and planning for the timing possibilities here, and both for maintaining business strength in its still early and fragile here-and-now, and for building for its longer-term. Normative business models explicitly seek to pace out the risk that has to be accepted, spreading its emergence over time. And they seek to distribute it more effectively within their systems as it does arise so no one area of their enterprise is avoidably more explicitly prone to single point of failure or other avoidably increased harm. All three of these models take this type of analysis into consideration. But normative business models carry out this type of analysis as a more fundamental element of their overall planning and execution as they are more fully built around finding effective business model compromise and balance point solutions.

I stated at the end of Part 22, that I would explicitly address the issues raised by a single key word that I used there, and I turn to do so here. The word in question is “essential.” And if I were to distinguish between the three basic business models discussed here, in terms of one word, it would be in noting how their owners and managers variously find meaning in that one. Businesses that follow these three approaches all seek to optimize what they are doing and what they are building for, in terms of their understanding as to what is essential and what is most essential and certainly in their immediate here-and-now. But they can systematically differ in where and how they use this type of word and both in that immediate here-and-now and as they plan forward and for their long-term too.

I have at least begun to explore what is essential in this posting, and will continue to do so in a next series installment where I will more generally consider the issues of stability and opportunity, as pressures towards them can come into alignment and as they can come into at least apparent conflict too. In anticipation of that discussion to come, I will continue to focus on first steps that businesses take when entering their first early growth phase and for the three basic business models under consideration here. And as part of that, I note here that where stability and opportunity and the benefits side to what would enter into a more traditional SWOT analysis, offer a roadmap to where a business seeks to go, risk and threats and potential weaknesses, inform how and when and according to what timetable this might be carried out along.

Meanwhile, you can find this and related material at my Startups and Early Stage Businesses directory and at its Page 2 continuation.

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