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Business Planning Myopia
With few exceptions, business plans tend to change
very little from year to year. In most cases it's a
matter taking last year's plan, making a few modifications, changing the dates and the title page and attaching new financials. After all, we're not reinventing the wheel here. Your market is the same, your organization hasn't changed that much and you still have the same customers, give or take a few. So why change the plan.
Let me offer two possible reasons:
1. Internet
Easily the most pervasive and fundamental change in our business landscape, Internet has far reaching implications in terms of how we reach, service and communicate with customers. The rapid and phenomenal growth of this technology, however, has created an interesting anomaly among corporate business planners. On one hand, most everyone acknowledges that their business plans should incorporate a well thought out and executable Internet strategy. But the issue of determining what that strategy is exactly and what it should include is a little more difficult. An example is Electronic Commerce.
When someone mentions e-commerce, if you're like most of us the first companies that come to mind are the pure-plays like Amazon.com, Priceline.com, Buy.com and that genre of high profile on-line retailer who seem to be in the news almost daily. It is estimated that these and other on-line retailers will generate in excess of $50 billion in revenue this year. But as impressive as this number is, it pales in comparison to the estimated $380 billion in total e-commerce business. So where is the remainder of this e-revenue coming from. Clearly the service sector is a contributor but the largest component are the B to Bs and the thousands of companies who have recognized that the Internet can be a very effective alternative distribution channel. Companies like Dell Computer whose on-line revenue now exceeds $6 million per day.
Another example that may not be quite as familiar to you is Milacron Inc., a multibillion-dollar Midwest manufacturer of metalworking products (formerly Cincinnati Milacron). Milacron has launched a successful e-business initiative directed at small metalworking shops. This proverbial "low end" of their market was a large, fragmented and highly inefficient segment that Milacron was unable to economically reach with their traditional methods of distribution. By using Internet, however, they were able to successfully open up this significant new market with margins that are higher then their previous average. Is Milacron unique? Hardly. Forrester Research predicts that e-commerce revenue will exceed $1.3 trillion by 2003 and that close to 70% of all businesses will have some form electronic commerce activity.
While this is all well and good, we also know that Internet isn't for everyone and it could be that you're better off directing those precious resources in a different direction. How do you know if Internet should be part of your future plans? Answers to the following questions might help you decide.
Can Internet be used to improve your customer facing transactions, to make it easier for customers to interact with your company? Can your Internet presence be more effectively utilized to not only position and promote your business but also to educate your customers and prospects. Can you better position your company through Internet as a resource for current and future customers? Will e-commerce ever be a part of your distribution channel strategies? Are there market segments that you're not reaching now that you can reach economically via Internet?
If your answer to one or more of the above questions is yes, then you should probably have an Internet strategy as part of your business plan. Your plan should also address internal changes that may be necessary to assure the proper implementation of your Internet strategy.
2.Inertia
I think it was Galileo who originally defined the concept of inertia although Al Gore takes credit for it. (If it wasn't Galileo, would someone please let me know so that I won't keep making this embarrassing mistake). In essence, what this individual said was that objects moving in one direction tend to want to continue to move in that same direction. Sound familiar?
This very same concept applies to businesses. Strategies developed years ago are still in motion today, not because they represent the best strategies or
best alternatives. It's just the way things have always been done. And lets face it, it's much easier and far less stressful to simply avoid changes.
K-Mart is an interesting example. This company arguably created and owned the discount / general merchandise category for many years and dominated their early competition to point of causing extinction (WT Grant and to a lesser extent Woolworth). Why would K-Mart ever want to consider a changing their strategy. The answer in one word - Wal-Mart.
Unlike K-Mart, Wal-Mart's strategy was to go after smaller markets with stand-alone stores using brand merchandise - three distinct strategies that were diametrically opposed to the direction that K-Mart had committed to (large markets, attached stores, private brand merchandise). When Sam Walton opened his first small store in Little Rock, Arkansas in 1972, K-Mart had over 1,600 hundred store locations. Today, Wal-Mart isn't just the largest discounter with over 5000 stores, they are now the largest retailer in the world and represent an incredible success story. And K-Mart? Well, K-Mart is still K-Mart.
The lesson to be learned here is that it is almost never a good idea to have a new strategy forced on you. IBM's decision to lessen their reliance on their mainframe computer business, for example, wasn't entirely voluntary nor was the decision on the part of Borders or Barnes & Noble to enter into the e-commerce business. In each case, it was defensive measure and a matter of self-preservation.
One of the reasons a business plan can and should be such a valuable asset is because it offers us
that rare opportunity to look into the future and predict with some degree of certainty what is going to happen. The accuracy of course depends on the planner but as a general rule major surprises are rare, or at least they should be. Wal-Mart wasn't exactly a stealth operation. Changes in IBM's mainframe business didn't happen overnight and who didn't foresee the impact that Amazon.com was going to have on the brick and mortar bookstores.
Your business plan should provide ample warning that there is something on the horizon but it doesn't necessarily guarantee that changes are going to be made. In some cases it could be that the threat is downplayed or timing is misjudged. But the most common problem is that business plans are very often is relegated to a middle management function with inadequate visibility.
When this happens, the plan invariably lacks perspective, vision, scope and most importantly the visible support and cooperation of senior management.
It is also critically important that the planner is able to function as an antagonist, to ask tough questions, to probe and work freely and unencumbered by company politics or organizational issues.
Here's how the process might have worked at K-Mart circa 1975.
K-Mart Business Planner - "According to our demographic analysis, the number of smaller markets outnumber the larger markets by a ratio of 50 to 1."
Executive - "That may be true, but smaller markets also mean a much smaller number of potential consumers, or didn't you think of that," a smug look on his face.
K-Mart Business Planner - "But smaller markets also mean fewer competitors. Wal-Mart's in-store traffic is 20% higher than ours and their average individual purchase is almost 30% higher than ours."
Executive - "Wal-Mart, who's Wal-Mart. And are you suggesting that we abandon our strategic direction and shift gears midstream."
K-Mart Business Planner - "What I am suggesting is that we more closely examine this market and consider our options. One possible strategy would be to bracket Wal-Mart by introducing a line of stores aimed at the smaller markets. With our economies of scale, merchandising acumen and marketing clout, we should be able to own this segment and minimize the impact of future competition at the same time."
Using your business plan to discuss, analyze and review options is no guarantee that you'll always make the right decision. What it does assure, however, is that you're making an informed decision based on the best available information.
About the Author
Daniel McGilvery is President of The Business Planning Institute ("BPI"). BPI provides professional business plan writing, editing and review services. Contact BPI at info@bpiplans.com or visit their Web site at www.bpiplans.com
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