Start-up business plan essentials: Preparing for change and growth
It’s hard to know exactly what path your business journey will take but planning as much as you can for the unpredictable is key. Here’s why
Nothing lasts forever in business and arguably today’s commercial world is one of the most changing and competitive; with new technology and software constantly evolving the market – and traditional businesses pushing to offer something unique, such as the well-documented cereal café in Shoreditch or Belfast’s crisp-sandwich eatery, so they can stand out from the crowd.
However, unique and innovative ideas are one thing but you must be able to adapt and grow, and that preparation should start from the very beginning – in your business plan. Including a growth and change strategy within your business plan will help you prepare for unexpected developments that might put your firm at risk, and will help support your start-up’s sustainable future; it also increases your attractiveness to investors and other funding bodies as it proves that you have a realistic mindset for your firm and are prepared for the unexpected.
Here we look at lifecycle strategies; assessing portfolio prospects; and reviewing growth options so you can put a business plan together that will engage with the changes that are likely to occur in your industry, and prepare steps to take to keep your business on a successful road.
Products and services typically go through five distinct stages throughout their life from birth to death – or re-launch if that proves to be a viable marketing strategy.
1. Research and development: This stage is typified by cash outlays only and can last years in the case of medical products or a few months, even weeks, for a simple consumer product.
2. Introduction: Here, the product is brought to market, perhaps just to one initial segment, and it may comprise little more than a test marketing activity. Once again, costs are high; advertising and selling costs have to be borne up front and sales revenues will be minimum.
3. Growth: This stage sees the product sold across the whole range of a company’s market segments, gaining market acceptance and becoming profitable.
4. Maturity and saturation: Sales peak as the limit of customers’ capacity to consume is reached and competitors or substitute products enter the market. Profit starts to tail off as prices drop and advertising is stepped up to beat off competitors.
5. Decline: Sales and profits fall away as competition becomes heavy and better and more competitive, or technologically more advanced products come into the market.
The usefulness of the lifecycle as a marketing tool is as an aid to deciding on the appropriate strategy to incorporate into your business plan. For example, at the introduction stage the goal for advertising and promotion may be to inform and educate; during the growth stage differences need to be stressed to keep competitors at bay; during maturity customers need to be reminded you are still around and it is time to buy again. During decline, it is probable that advertising budgets could be cut and prices lowered. As all major costs associated with the product will have been covered at this point this should still be a profitable stage.
Of course, these are only examples of possible strategies rather than rules to be followed. For example, many products are successfully re-launched during the decline stage by changing an element of the marketing mix or by being positioned into a different marketplace.
Assessing your business portfolio
Developed by the Boston Consulting Group (BCG), the American management consultants, the BCG matrix can be used in conjunction with the lifecycle concept to plan a portfolio of product/service offers. The thinking behind the matrix is that a company’s products and services should be classified according to their cash generating or consumption ability against two dimensions: the market growth rate and the company’s market share. Cash is used as the measure rather than profit, as that is the real resource used to invest in new offers.
The objective then is to use the positive cashflow generated from ‘cash cows’, usually mature products/offers that no longer need heavy marketing support, to invest in ‘stars’, that is, fast growing, usually newer products/offers, positioned in markets in which the company already has a high market share – usually newer markets. ‘Dogs’ should be disinvested and ‘question marks’ limited in number and watched carefully to see if they are more likely to become stars or dogs. You should show the role, relevant experience and resources that your partners will bring to the venture over the period covered by the business plan, together with their share of the ownership.
According to Young Gun and 2013's Golden Gun Holly Tucker of notonthehighstreet.com, innovating and adapting your portfolio to the market is key, “We recognise the need to adapt our business model in order to meet the demands of our customers, introducing a printed catalogue to run alongside the online version of the service, for instance.”
Reviewing growth options
The classic business planning tool for reviewing growth options is Ansoff’s growth matrix named after the father of strategic planning, Professor Igor Ansoff. Ansoff suggested managers consider growth options as a square matrix divided into four segments. The x-axis is divided into existing and new products, and the y-axis into existing and new markets. Ansoff assigned titles and level of risk to the resulting types of strategies:
- Market penetration: This involves selling more of your existing products and services to existing customers; it is the lowest-risk strategy.
- Product/service development: Involves creating extensions to your existing products, or new products to sell to your existing customer base. This is more risky than market penetration, but less risky than market development.
- Depth of line: This is the situation when a company has many products within a particular category. Washing powders and breakfast cereals are classic examples of businesses that offer scores of products into the same marketplace. The benefits to the company include that the same channels of distribution and buyers are being used. A weakness is that all these products are subject to similar threats and dangers. However ‘deep’ your beers and spirits range, for example, you will always face the threat of higher taxes or the opprobrium of those who think you are damaging people’s health.
- Breadth of line: This is where a company has a variety of products of different types, such as Marlboro with cigarettes and fashion clothing, or 3M with its extensive variety of adhesives and adhesive- related products, such as Post- it® notes.
- Market development: Involves entering new market segments or completely new markets, either in your home country or abroad. You will face new competitors and may not understand the customers as well as you do your current ones.
- Diversification: Is selling new products into new markets: the most risky strategy as both are relative unknowns. Avoid this strategy unless all others have been exhausted. Diversification can be further subdivided into four categories of increasing risk profile:
- Horizontal diversification: Entirely new product into current market.
- Vertical diversification: Move backwards into company’s suppliers or forward into customer’s business.
- Concentric diversification: New product closely related to current products either in terms of technology or marketing presence but in a new market.
- Conglomerate diversification: Completely new product into a new market.
Use Ansoff’s growth matrix to check that your business plan contains a reasonable balance of strategies. Too much emphasis on achieving growth, say through diversification or launching new products, may seem too risky to new sources of finance.
Forging strategic alliances
The most successful businesses forge relationships with businesses up and down their supply chain that go beyond simply buying and selling.Unity Group chairman and serial start-up entrepreneur, Jeremy Harbour, is an advocate here: “When I’ve looked at businesses I quite often find that if you look at all of the products and services you supply, and all of the customers you’ve got, your product penetration into those customers is normally about 10% or 15%. So, if you’re doing £1m turnover, there’s potentially another £9m worth of sales that are already in that customer base that you’re just not accessing. And if it’s a question there not being that much potential in there, then perhaps you need to look at adding some new products.”
So partner with someone who wants to target your customer base and white label their products with your brand and sell them into your customer base because there’s some really quick wins available. More formal relationships that can be incorporated into a business plan for growth, here's an example of some:
Acquisitions: When one company buys another – more often than not in a ‘friendly’ deal, but sometimes events are not so harmonious. After the acquisition only the parent company usually exists in any real legal sense and the top management of the ‘victim’ usually depart quickly.
Mergers: Where companies join forces and the separate identities of the businesses of the companies concerned continue after the deal is consummated.
Joint ventures: When two or more companies decide to set up a separate third business to exploit something together. There may be no attempt to harmonise the whole of the two parent businesses, and the joint venture may be disbanded when the reasons they joined forces in the first place disappear.
The first task of a leader is to define an organisation’s purpose and direction. This inevitably means changing these in response to changing circumstances. The business plan should show how such changes will be managed and the new goals achieved. Because change is inevitable and unpredictable in its consequences doesn't mean that it can’t be managed as a process and incorporated into your business plan. These are the stages in managing change:
- Tell people why: Change is better accepted when people are given a compelling business reason.
- Make it manageable: Even when people accept what needs to be done, the change may just be too big for anyone to handle. Breaking it down into manageable chunks can help overcome this.
- Take a shared approach: Involve people early, asking them to join you in managing change. Give key participants some say in shaping the change right from the start; this will reduce the feeling that change is being imposed and more brains will be brought to bear on the problem.
- Reward success early: Flag up successes as quickly as possible. Don’t wait for the year- end or the appraisal cycle. This will inspire confidence and keep the change process on track.
- Expect resistance: Not everyone will be equally enthusiastic or committed to change. Some people may lose status, power or even pay. The trick here is to lever on the people who will help, recognise those who could hinder and plan accordingly.
- Recognise that change takes longer than expected: People typically go through seven stages when experiencing change – immobilisation or shock; disbelief; depression; acceptance of reality; testing out the new situation; rationalising why it’s happening; and then, finally, acceptance. Most major changes make things worse before they make them better. More often than not the immediate impact of change is a decrease in productivity as people struggle to cope with new ways of working, while they move up their own learning curve. The doubters will gloat and even the change champions may waver, but the greatest danger now is pulling the plug on the plan and either adopting a new plan or reverting to the status quo. To prevent this ‘disappointment’, it is vital to both set realistic goals for the change period and to anticipate the time lag between change and results.
Planning for growth, and failure, may seem premature when your business is only starting out but companies must be prepared for change to keep an upwards growth trajectory.
For more information on creating and applying a businesses plan, have a look at our other start-up business plan essentials: Testing your business idea, Understanding your customers, Sizing up the relevant market, Understanding your market and Preparing for the oral presentation.