Business Planning Papers:

1. Avoid Business Failure
This paper is most relevant to entrepreneurs or management teams that have a clear vision and mission for their business and are in the process of developing the primary strategies to be followed. It is closely linked to other papers in this series, most notably Developing a Strategic Business Plan which offers a framework for a strategic plan and Getting New Business Ideas. The development of a suite of strategies is an iterative process and involves circular thinking on the basis that optimal strategies will evolve gradually and be very interdependent. Accordingly, the best way to utilize this paper is to review it in its entirety and then use it as a checklist and basis for brainstorming and systematic analysis.
A venture is most prone to failure during its first three or so years of operation - the so-called 'valley of death'. A key to getting through these early years is to avoid the obvious mistakes. Generally speaking, businesses fail for significant and substantial reasons which are often very evident to outsiders. Insiders often fail to see them because of their closeness, determination and so on.
Basic reasons for failure include the following:
Finance
Markets/Sales
Management
Offerings
Operations
Underestimating start-up costs (for operations & capital expenditure).
Misjudging the size or growth of the overall market.
Lack of relevant sectorial experience.
Inability to supply profitably to required price.
Under-investment in equipment etc.
Insufficient funds or access to top-up finance.
Overoptimistic estimates of market penetration & shares.
Insufficient functional breadth.
Problems with maintaining quality standards.
Excessive overheads (relative to scale of operations).
Wrong mix of funds (e.g. too much debt and gearing too high).
Delays in securing or developing distribution channels.
Unresolved differences of opinion.
Restricted range of offerings.
High operational costs and/or low productivity.
Over reliance on trade credit (receivables).
Underestimating the strength of competitors.
Unreal expectations.
Lack of innovation (me-too offerings).
Poor capacity utilization.
Mistaking profit for cash flow (see here).
Misreading customer requirements.
No formal or clear structures.
Problems sourcing supplies.
Inadequate physical distribution.
Overoptimistic projections or overtrading.
Lack of promotion & customer awareness.
Ineffective financial & managerial control systems.
Offerings out of line with customer needs.
Inappropriate business location.
Unable to withstand interest rate increases.
Inability to handle an economic slowdown.
Clearly, there are very many other reasons as to why businesses fail. The key point is that causes are usually very apparent (especially with hindsight) and the trick is to anticipate them by executing appropriate strategies at the outset. Three examples:
Use market research to confirm demand and assess suitability of proposed offerings.
Create a management team to offset any gaps in experience or expertise.
Raise equity to reduce exposure to interest rate changes, reduce gearing etc.
Given that reasons for failure are often both simple and clear, it should (in theory) be possible to reduce the possibility of failure through prior experience, forethought and effective planning. Have a look at Quick Insight, an expert software tool for assessing business proposals.
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2. Characteristics of Successful Businesses
A successful emerging growth business is likely to display many of the following characteristics:
Sensibly financed (with prudent mix of equity and debt).
Strong cash position (with access to follow-on or contingency funds).
Offers above-average profitability (in terms of return on capital invested).
Aims for rapid growth in revenues (with profits lagging but in prospect).
Targets expanding, or otherwise attractive, market segments.
Develops a strong franchise or brand.
Devotes substantial resources to innovation (R&D, offerings or market).
Competes on non-price issues (e.g. quality, service, functionality).
Very close to customers and responsive to their needs.
Seeks specialist/leadership image with superior offerings.
Well managed with high-grade staff & good people-management.
Behind every characteristic there should be an explicit strategy designed to increase the chances of success and not simply aimed at reducing the likelihood of failure. For example:
A growth business needs a cash war chest and not merely "adequate" debt facilities.
Likewise, its management team must have the capacity to manage the present business as well as its growth.
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3. Clarify Existing Business Strategies
In planning new strategies for a business, it is essential to define its current (implicit or explicit) strategies for the business as a whole and its main functional areas - finance, marketing, sales, management, operations etc. Do this by setting out a series of short strategic statements. Some examples:
The business has been financed entirely from retained profits and without recourse to debt or external equity.
The implicit sales strategy has been to offer a very broad range of products at premium prices and to invest heavily in promotion.
The senior management team has been drawn exclusively from family members.
Instead of doing R&D, the business copies competing products and sells them at a discount.
To get at the root (fundamental) strategies, critically examine each statement. For example:
How has the company really been funded?
How has the company sought to increase sales and market share?
How have productivity/costs moved?
Up to eight statements should suffice to cover all the essentials. Ask whether they contain the seeds for significant growth or merely represent hedges against possible failure.
Undertake separate analyses for each business unit if a large corporation is being appraised.