CHAPTER TWO

Develop a Great Business Plan

“You decide what it is you want to accomplish and
then you lay out your plans to get there, and then
you just do it. It’s pretty straightforward.”

—NANCY DITZ, MARATHONER

People and organizations with clear visions, values, and plans tend to accomplish far more and do it faster than their competitors. When everyone in your organization is united by a clear strategic vision of your desired future state, you create a powerful mental synergy that will move you toward your goals and move your goals toward you.

The major reasons for success in business and in life are focus and concentration. The major reasons for failure are lack of direction and diffusion of effort. This chapter shows you how to achieve far more of the former and avoid much of the latter.

Alexander the Great

The world has become an increasingly challenging place for businesspeople. Not only is it more difficult than ever to create a business, but there are more threats from competitors, angry consumers, and government regulators. In the battleground we are facing in the new century, it’s helpful to look to history for insight.

Alexander the Great was an extraordinarily gifted strategic planner in his military conquests. Had he been alive today, he could have taught us much about how to survive and thrive in turbulent economic times. More than two millennia ago, at the Battle of Arbela in 331 BC, he became the master of the known world by defeating Darius of Persia in a pitched battle where Alexander was outnumbered five to one. Alexander was able to accomplish this incredible feat because of his ability to focus his limited strength on the one strategic variable upon which hinged the power of the Persian army: Darius himself.

Whether or not you are a fan of military metaphor, the reality is that the economic situation today is putting many entrepreneurs and managers in survival mode, in constant combat to achieve profitability. You should become familiar with seven key military principles of strategy that are applicable to setting corporate strategy in an uncertain business world today:

1. Objective

2. Offensive

3. Concentration

4. Economy

5. Flexibility

6. Surprise

7. Momentum

The Principle of the Objective

Alexander had a clear vision of what he wanted to accomplish and why. He knew that he would have to achieve a decisive victory over the Persian army to bring all of the Persian empire under his control. He also knew that the Persian army was made up of contingents from all over the empire. The only factor that held them together was loyalty to Darius himself. If Alexander could kill or disable Darius, the rest of the army would break up and scatter.

The night before the battle, Alexander called his officers together and told them how they were going to win the battle the following morning against such overwhelming odds. They would not try to defeat the entire Persian army. There were too many. They would instead focus their army and hurl it like a spear into the center of the Persian line at Darius himself. Then Alexander told his officers to go back to their troops and give them the order of battle. It was simply, “Kill Darius!”

After the battle began, at the appropriate moment, Alexander led his companion cavalry, perhaps the finest cavalry in the world at that time, into the center of the Persian army, straight at Darius. The attack came so suddenly that Darius was completely unprepared. According to historians, Darius leaped onto a mare and rode frantically off the battlefield, leaving his army to fend for itself.

Just as Alexander had predicted, the army soon began to break up and scatter. At the end of the day, he had destroyed the Persian army and become master of the greatest empire in the world. One key lesson from Darius’ defeat is that you as a leader cannot abandon your team or neglect your primary objective no matter how sudden or furious the challenge you’re experiencing. Your behavior at that key moment has huge influence on your team and on your chances for victory.

The Principle of the Offensive

Even though Alexander was greatly outnumbered by the army of Darius, he initiated the attack and thereby took control of the battle. His actions illustrate what Napoleon said many years later: “No great battles are ever won on the defensive.”

Your ability to develop your strategic plan and then to launch it like a javelin into the heart of the market, practicing the “continuous offensive,” enables you to take the initiative and control your financial destiny.

The Principle of Concentration

Alexander was able to concentrate his forces on one objective, the Persian king Darius. In business, your ability to concentrate your limited resources on selling the very best products and services you offer to the very best potential prospects for those products and services is the key to business victory.

The Principle of Economy

Alexander used his outnumbered forces to accomplish the objective with the least expenditure of men and resources. By the end of the day, the Persian army was eliminated as a fighting force while the casualties to Alexander’s army were minor.

In strategic thinking, your goal is to use brain power and creativity to achieve your goals of market success with the minimum possible expenditure of time and money.

The Principle of Flexibility

The greatest talent an organization can acquire is flexibility. Alexander’s forces were able to remain flexible and shift the direction of attack when the opportunity arose. Each officer on the field had the authority to act in response to changing conditions. In the Persian army, Darius was the supreme commander. Each officer was assigned to perform a specific function without deviation or diversion. When the battle unfolded in an unexpected way, the Persian army was unable to adapt fast enough.

In business, with turbulence, uncertainty, and change taking place incessantly, unpredictably, and unexpectedly, you must maintain the flexibility to change your product/service mix, people and assignments, markets and sales techniques, products and prices, and every other factor of your business to achieve sales and profitability against determined competition.

The Principle of Surprise

Alexander used surprise to his great advantage. Instead of lining up his Macedonian soldiers in a long row to confront the Persian army, making it easy for the Persians to overlap the Macedonians on the flanks, Alexander organized his army in a more flexible formation, which allowed him to shift his point of attack and forces as the battle unfolded.

In your business, you must be prepared to do the unexpected, to counter your competition with rapid changes in products, prices, promotional methods, and places of sale. You must always think of doing something that your competition has not anticipated.

The Principle of Momentum

Once Alexander achieved his desired objective by driving Darius from the field, he immediately focused all his forces to exploit his “market advantage” to the fullest extent possible in the shortest period of time, thereby achieving the destruction of the Persian army.

In business, once you have a market advantage, you must “sell all you can.” You must seize the day and press forward aggressively to achieve every dollar of profitable sales that you possibly can while the window of opportunity is open and before your competition has a chance to counterattack.

Business coach Marshall Goldsmith says, “There are three factors that must dominate your thinking and which will determine your success or failure: competition, competition, and competition.”

The Battle of the Business Plans

With financial markets on the verge of collapse in 2008, Mike Moritz and his partners at Sequoia Capital huddled with business owners to review a slide deck of doom, a fifty-six-slide PowerPoint plan describing a brave new world without credit, where nothing would be financed without solid cash flows. They predicted it would take years for the world to recover.

It is difficult to plan for economic scenarios like the one experienced in 2008–2009. Fortunately for Moritz, the dot-com bust a decade earlier had given his team experience in responding to sudden changes in fortune. When the economy imploded, they knew how to shift risk and cut costs faster than ever before.

No successful investor in the world was immune from the pain, and Moritz is one investor who has seen it all. Sequoia has launched many legends in California’s Silicon Valley, including Apple, Cisco, Atari, Google, YouTube, Zappos, and Yahoo.

When the storm descended, Moritz and the management teams of his companies undertook a crash course in strategic and financial planning. They worked around the clock to create many different versions of their business plans. Moritz would often reassure those who had pulled all-nighters by repeating an ironic-sounding mantra: Plans may not work, but planning does!

In other words, the economy may not make it possible to deliver on your plan exactly as you planned it, but the process of planning is mission critical. It is the only way to be clear about your choices. Planning is essential to consider what it takes to survive, grow, and prosper in any economic environment.

In turbulent economic cycles, the planning process is no longer the abstract endeavor taught in business school; every alternative must be considered and the best options turned instantly into action. During the crisis, Moritz’s companies had a clear plan to track where every penny was spent and tie it back to customer service, quality, innovation, and growth.

Your ability to develop a great business plan, and then to set and implement business strategy, is at the heart of your business success.

Make the Plan Useful

When we talk about a business plan, we are not referring to that binder or spreadsheet that you worked so hard to produce just to impress someone else, but then never looked at again after your presentation. We are talking about a living document—a guide that you can use to power your business.

“Judging by all the hoopla surrounding business plans, you would think that the only things standing between a would-be entrepreneur and spectacular success are glossy five-color charts, a bundle of meticulous-looking spreadsheets, and a decade of month-by-month financial projections,” says William A. Sahlman, professor of business administration at the Harvard Business School. “Nothing could be further from the truth.”

You will find entire college courses focusing on business plans that are philosophically correct but practically useless.

Put Measures in Your Plans

What is missing from most plans is that they are disconnected from what actually drives your customers and the success of your business. “In manufacturing, such a driver might be the yield on a production process; in magazine publishing, the anticipated renewal rate; or in software, the impact of using various distribution channels,” Professor Sahlman noted. In every business there are a few key measures that make all the difference.

What are the three drivers that impact your profitability most? What three factors drive your customers to buy and remain loyal? Your task is to get clear about those questions.

Practice What You Preach

Effective leaders are clear about the measures they use to monitor the success of their businesses and demonstrate this financial discipline in everything they do.

For example, Warren Buffett’s frugality is legendary, and it is more than an act or old habit. It’s symbolic for his team. Buffett is famous for driving older cars, preferring Diet Coke to expensive wine, and living in his long-time residence in Omaha.

IKEA’s discount furniture founder, Ingvar Kamprad, one of the world’s ten richest men, rides the public train, lives rather modestly, and constantly challenges his people to make things cheaper and more beautiful at the same time. While being interviewed for this book, Kamprad treated Mark to a meal of Swedish meatballs in the cafeteria at an IKEA store in St. Gallen, Switzerland, then drove him back to his motel in a seven-year-old Volvo. Is it a show or is he really frugal? The only thing that matters is that he’s sending everyone a message about setting the right priorities in his business.

The world’s richest man, according to Forbes, is Carlos Slim Helu. The self-made telecommunications tycoon, whose parents emigrated from Lebanon to Mexico City, has lived in the same house for decades and his master bedroom is famously small. Like Bill Gates and Buffett before him, Carlos Slim would rather not make a fuss about being the world’s richest person. He knows that a fickle stock market could change that situation in a heartbeat.

Ironically, the world’s wealthiest entrepreneurs recommend that you don’t try to keep up with the Joneses or worry about who has the most wealth, power, or status. Instead, their stories show how success is acquired by staying focused on what’s really important to the entrepreneur’s long-term strategy.

Five Good Reasons for Setting Strategy

Before the “What?” always comes the “Why?” It is only possible for you to set effective strategy and develop a great business plan when you are crystal clear about why you are doing it. There are five reasons for setting business strategy:

1. To increase return on equity invested. The first purpose is to organize and reallocate your resources to increase your return on the amount of money actually invested in your company. It is to earn more bottom-line profitability than you are producing today.

2. To reposition yourself relative to your competitors. Business strategy allows you to change customer perceptions and responses to your product or service offerings. You must continually upgrade your existing product and service offerings and develop new ones in response to changing wants, demands, tastes, and customer preferences.

3. To capitalize on strengths and opportunities. You must take advantage of those special talents and capabilities that make your business superior to your competition and do things that your competition cannot duplicate, at least in the short term. You must remain open to unexpected changes in your marketplace. Whenever there is an economic disruption or a business reversal, stop the clock and rethink your strategy to make sure it is appropriate to the new situation. Always be open to the possibility that your current strategy is no longer the best for the markets of today and tomorrow.

4. To form a basis for making better decisions. All strategic and business thinking must lead to immediate action to increase sales and profitability relative to the past, and relative to your competition.

5. To attract investors and financing. Raising capital requires a special approach to the planning process. Look at your business through the eyes of a potential lender or investor, and create plans that make your company an attractive place to invest. The firms that typically receive the most dollars in first-time financings are in businesses that have at least four things going for them:

Great business model. Your idea should open new, large markets in ways that are tough for competitors to copy quickly. The size and profitability of the market opportunity is critical. That’s why you need a great plan to show investors.

Scalability. Can the business build the necessary products and services rapidly and achieve economies of scale with as little capital investment and labor as possible? The less money invested, of course, the lower the risk and the higher the return on investment.

Intellectual property (IP). Do you have patents or other ways to help protect your ideas? Patent protection is no guarantee, but it does improve the chances of building businesses that have more sustainable competitive advantages in the marketplace.

Experience in related fields. Investors highly prize gifted leaders who are “serial entrepreneurs” – business veterans who have experience in other similar ventures or who can become great managers or delegators quickly. Investors are betting on an idea and its execution, not just you. They need to know their investment isn’t entirely at risk if the founder is “lost or stolen.” You must convince them that your business is a good place to invest and that you are a great manager who can help them profit handsomely. You have to prove to investors that you have the ability to put together a leadership team quickly and grow the company by calling on the skills, efforts, and commitment of leaders other than yourself on the operating staff.

Six Key Questions in Strategic Planning

Whenever you must create or reinvent the direction of your organization, there are six questions, in order, that you must answer correctly. You’ve heard the expression “garbage in, garbage out.” The quality of your thinking and decisions is determined solely by the quality of the information you begin with.

1. Where are you now? What is your current situation? If your business was in trouble and you hired an outside consulting firm to come in to help, the first things the consultants would do would be to determine your exact levels of sales in every product/service area, the relative profitability of each of your products and services, the trends in each area, the amount of money you have and will have in the foreseeable future, and your position relative to your competition. These are all pieces of information that you can and must generate for yourself.

2. How did you get to where you are today? What were the factors and decisions that led to your current situation? Be your own management consultant. Be prepared to face “the brutal truth,” as Jim Collins calls it, about how you got to where you are today. Refuse to flinch or exaggerate, especially when you have problems with sales and profitability.

Jack Welch insisted his managers practice the “reality principle,” which he defined as “being willing to face the world as it is, rather than the way you wish it could be.”

You cannot resolve a problem or resolve a difficult situation unless you have the courage to face the current facts squarely, whatever they are. Reevaluate all your business activities. Is everything you are doing necessary to win and keep customers? What savings could you generate by partnering with other companies to do work or carry overhead? Could you share a warehouse or manufacturing plant with a neighboring firm? Can you share an accounting department? What activities could you outsource without reducing quality or service to your customers?

3. Where do you want to go from here? What do you want to accomplish? Clearly describe the ideal desired outcome for your business. Project forward five years and imagine that your business was perfect. The greater clarity you have about where you want to be at a specific time in the future, the easier it will be for you to create a great business plan, or blueprint, that will enable you to get from where you are today to where you want to go. Be specific about your future goals and desired outcome. For instance:

How much product would you be selling five years from now?

How much would you be earning (gross and net), and how does that compare with your competitors?

How many people would be working in your business?

Who would your customers be, and where would they be located?

4. How do you get from where you are today to where you want to be in the future? What are the steps that you will have to take to create your ideal future business? Make a list. Write down every single thing that you can possibly think of that you would have to do to achieve your goals in the future. As you think of new actions, tasks, or steps, add them to the list. This information then becomes your recipe or formula for achieving your business goals.

5. What obstacles will you have to overcome? What problems will you have to solve? Of all the problems or obstacles standing between you and your desired future outcomes, what are the biggest or most important? If you aren’t already a fast-growing, highly profitable company, why not? What is holding you back? What are the critical constraints or limiting factors for growth? Sometimes, just identifying and removing one critical block or obstacle can turn your company into a more profitable enterprise.

6. What additional knowledge, skills, or resources will you require to achieve your strategic objectives? What additional competencies or capabilities will you need if you want to lead your field in the years ahead? Every business begins and grows around a set of core competencies, but there are almost always additional core competencies that you’ll need to acquire or develop over time. If your company is already the market leader, then explore what new areas you can excel in. And most of all, ask yourself what you can do, starting today, to begin to achieve those core competencies to create your business of the future.

Drucker’s Five Questions

Peter Drucker insisted that leaders ponder several deceptively simple questions about their organization. It takes a few seconds to read them and often it takes hours to answer them. The clarity and simplicity of each question forces you to reexamine many assumptions you and your team may have about your organization. Here are the five questions:

1. What is your mission? Why does your organization exist in the first place? What are you trying to accomplish for your client?

2. Who is your customer? Describe the exact person you are focused on satisfying with your activities.

3. What does your customer value? What is it that you do especially well that you are uniquely suited to provide to your customers? How can you exceed the standards set by your competition?

4. What results are you trying to accomplish? How do you measure success?

5. What is your plan? How do you go about satisfying your customers and getting the results that are most important?

We challenge you to take enough time with your team to get these answers right when you do your planning. Based on your answers to these five questions, you can plan what to do next and what actions to take immediately.

Determining the Corporate Mission

The corporate mission is a clear statement of why the company exists in the first place. The corporate mission states an overarching goal and purpose, based on the values that guide decision making at every level of the company. It should be so clear and simple that, as Drucker also said, “It should fit on a T-shirt.”

Ideally, your mission statement should refer to your customer and the difference that your product or service is going to make in the life or work of your customer. YouTube founder Chad Hurley wanted to make it possible for people to send their own homemade videos to anyone. His original mission was a slogan on his website that said simply, BROADCAST YOURSELF.

“Charles Schwab’s mission was to be the ‘most useful and ethical financial services company.’ That statement reflected our vision and our values – it was our way of life!” said business strategist Karen Chang, former President of the Charles Schwab Individual Investor Enterprise.

Larry Page and Sergey Brin founded Google to organize millions of web pages so they could be found instantly and easily. Their original mission was to “index everything.” FedEx decided to bring packages to “the world on time,” and for a long while its memorable and effective ad slogan was “absolutely, positively overnight.”

What is your mission statement? How do you intend to benefit your customer? A mission is something that you can accomplish. You can measure it. A third party can tell you if you have achieved it or not. What is yours?

Your Most Valuable Asset

Within the first five minutes of meeting the legendary marketing scholar, Theodore Levitt, at Harvard Business School, he told Mark: “There is one asset more valuable than any other in your organization and your life – and you need to build it with care and ingenuity at every step in your journey. Your most valuable asset is your reputation.” A company’s reputation is defined as “how it is known and trusted (or not) by its customers,” he said.

If you want people say that you have “a great company,” then examine your reputation:

What is your reputation today? What do people say about your business?

What would you like your reputation to be? How would you like one customer to describe your company to another customer? How would you like outsiders to describe your products? Your services? Your people? Your management?

What should people be saying about you and your company if you wanted to be the best in your chosen market?

Most of all, what would have to happen, starting today, for you to create the kind of reputation you desire?

What would you have to do for people to say, “This is a great company!”

Choosing Your Competition

Choosing your strategy means choosing whom you will compete against. Don’t delude yourself. You might think you have no competition in your business, but there is always competition for your customer’s dollar, even if it’s not obvious.

Who are your main competitors today? What companies do your prospects choose to buy from, if not from you? What could you do to offset the perceived advantages of your competitors that cause your potential customers to buy from them?

Who are your secondary competitors? This is an important question because you want to know the other ways your prospective customers spend dollars that they could be spending with you. For example, when Carnival Cruise Lines asked this question during a seminar with Brian, the management team didn’t mention other oceangoing cruise lines. Instead, it immediately identifies itself as competing with all other “land-based vacations” and destinations.

Key Players in Setting Strategy

Who should be involved in the strategic planning process? The simple answer is that everyone who will be responsible for carrying out a part of the strategic plan should be involved in creating the plan in the first place.

Start with the company owner or the chief executive officer, the president, the chairperson, or whoever is the key person whose agreement, position, or authority is necessary to put the strategic plan into motion. If the plan is not totally supported from the top down, it will be ignored; or worse, it will be sabotaged. Take a look at the incentives or disincentives that people in the company have to implement the new strategy.

Setting corporate strategy is like improving your overall health. You must first put the right incentives in place to make sure that everyone has a vested interest in making the plan successful.

Saving Time and Money with Planning

Developing a complete business plan before starting operations will save you enormous amounts of time and money, and many months and years of hard work, frustration, and failure. But don’t put your business plan on a shelf. It should be changing constantly with each market test and every experiment to make you better and better.

A clear business plan gives you a competitive advantage. The process of planning—which includes getting continuous feedback on your progress and thinking through every detail—sharpens your mind and awareness, and makes it far more likely that you will be successful.

Finding the Right Way to Measure Your Progress

Ultimately your career and your company will be valued on the basis of key operating and financial metrics. One of your most important challenges as a leader is to find the right measures and focus on them. Every key person in your business must know with complete clarity which numbers are the most important and the most predictive of business success.

All business success is the result of changing one or more of these key numbers. Sometimes, these are called key performance indicators (KPIs) or critical success factors (CSFs).

We offer you this very simple sample set of thirty-three measures to inspire or provoke you to create your own dashboard for your business:

1. Sales of all products from all sources (your top line)

2. Other revenues of all kinds (nonsales activities)

3. Cost of goods sold (all inclusive)

4. Expenses (every cost of doing business)

5. Salaries and wages (usually the biggest single expense)

6. Lead generation (number and cost per lead)

7. Conversion rate from lead to customer

8. Cost of customer acquisition

9. Average size of sale

10. Average gross profit per sale

11. Average gross profit margin as a percentage

12. Average net profit per sale for each product or service

13. Average cost per sale (specific total cost per product)

14. Average number of times a customer buys

15. Lifetime value of a customer

16. Sales per employee (average)

17. Sales per day, week, month, or even hour

18. Sales per specific product or service

19. Average size of up-sells or cross-sells

20. Average number of referrals received

21. Average sales per square foot (retail)

22. ROI (return on money invested and working in the business)

23. ROE (return on owner’s equity in the business)

24. ROS (return on sales, or net profit from sales after all expenses)

25. Amount of receivables and how long outstanding

26. Amount of payables and when due

27. Amount of money in the bank

28. Amount of money drawn down on credit lines

29. Amount of debt in total owed by the business

30. General trend of key numbers

31. Number of orders for future fulfillment

32. Number and size of bad debts and past-due payments

33. Daily active users of your website, your services, your products

In addition to these metrics, there are hundreds more for every industry. Select a combination that is best for your unique business, to drive your customers and your team, and use those metrics as your dashboard.

Sometimes, an intense companywide focus on improving one key number can transform your business, but you must know which measure that is. This is a chief responsibility of management. You must develop a plan, a “full-court press,” to improve the most important number in your business. What is the most important metric for your organization? Whatever your answer, the dramatic improvement of your “economic denominator” is the key to building a great business.