“It’s not the size of the dog in the fight, it’s the size of the fight in the dog.”

Mark Twain

In this chapter

• Management
  • In an established business
  • In a start-up
• Marketing
  • In an established business
  • In a start-up
• Operations and capital expenditure
  • Supplies
  • Purchasing
  • Manufacture or service provision
  • Research and development
  • Distribution, storage and logistics
  • Customer service and technical support
  • Systems and IT
  • Quality and financial control
  • Regulatory compliance
• Resource risks and opportunities

In the last chapter you set out your firm’s strategy over the next few years. You explained how you planned to strengthen its competitive position in strategically selected product/market segments – whether by building on your strengths against key success factors (KSFs) or by working on weaknesses.

In short, you explained what your firm planned to do to achieve the goals set out in Chapter 2 of your plan. In this chapter you will set out how.

You will show how you will deploy the firm’s scarce resources to implement that strategy.

One caveat: if yours is a medium-sized business or bigger, you may be tempted to delegate each of the sections in this chapter to the respective heads of department – to the director of marketing, the chief information officer, or whomever. Fine, but make sure you edit the output in the style of the rest of the document. This business plan must flow with one style only. And remember that each of them would be capable of writing a 25-page report on their pet function alone. Restrict them to three to four pages, summarise their main findings in half a page or so and put their report into the appropriate appendix.

All resources must be competently deployed for your business plan to be successful. But some resources are more critical than others.

In my experience, having reviewed hundreds of business plans on behalf of investors or lenders, the backer’s pecking order of priority goes like this:

1. Management
2. Marketing
3. Operations.

Many investors say they back people, not products or services. That’s not the whole story (see below) – but it’s a hefty chunk of it.

And investors know that it’s no good having the best widget on the market if customers are unaware how good it is. So they are always keen to learn in detail about a firm’s marketing plans.

They also realise that management and marketing must permeate every link in the value chain in a successful organisation (see Figure 6.1). Managerial capability must be as evident in the inbound logistics as in the service ends of the business. A culture of marketing should ensure that product development, indeed the full R&D programme, is driven by the needs of the customer.

Then there’s the rest of the value chain. Each link is important; no link can be broken. But each link can be strengthened relatively painlessly if there is a weakness. Getting the supply chain right, streamlining the manufacturing process, outsourcing the logistics function, installing new enterprise resource or customer relations management software and so on can arguably be fixed – whether within the firm’s existing resources, through targeted recruitment or with the appropriate guidance from external consultants.

This is not necessarily the case with management. If a manager is not up to the job, and this is seldom a black and white issue, it can take time for this to be fully appreciated, whereupon finding the right replacement manager available at the right time can be a bit hit and miss.

figure 6.1 The value chain as seen by your backer

Nor is this the case with marketing. It can be difficult to change the culture of an organisation that believes that this is the way we have always done it here, or this is the kind of product we have always made here, and hang the customer. Your backer needs to know that your firm is market-led, not production-led.

So you’ll start your Chapter 6 with how your management resources are up to the task of delivering your plan. You will move on to your marketing resources and then address the rest of the value chain.

Management

In this section, you’ll set out why you have the right management team to ensure delivery of the plan. But be aware that your backer will be looking for a different balance of capabilities in an established business compared to a start-up.

In an established business

There are two schools of thought on management in an established business. There are some private equity players who say that, as in a start-up, management is the most important of all considerations in deciding whether or not to invest. To back up that belief, they will offer management teams extremely generous, ratcheted equity packages conditional upon delivery of the plan.

At the other extreme are private equity players who regard management effectively as units of production. They should do their job, be rewarded very well if they deliver and be replaced, ruthlessly, if they don’t. These players will undertake detailed due diligence on the market, finances, legals and so on, but little on the management. No need – management is replaceable.

Most private equity players lie somewhere in between. They conduct detailed management due diligence before investing. They would rather not have the hassle of replacing a manager during the plan period – better to weed the team before investing and stick with those they back.

Wherever they lie on the management dispensability spectrum, all private equity players will agree on this. They are looking for managers who can deliver against the plan, who can implement the strategy.

They want managers who can not only identify where the firm needs to strengthen its performance against one or another KSF, but also execute that performance improvement.

This has implications for what should go into your business plan, for each key manager:

• A one-page curriculum vitae, specifying roles held, with which firm and for how long, and highlighting major achievements against specific objectives within those roles – for Appendix D to your plan.
• A one-paragraph summary, with a sentence or two on relevant experience, including length of service at the firm, and selecting one example of how the manager delivered in a relevant role or against a relevant project – for this section of Chapter 6.

By the time your backer has read through six paragraphs for six key managers, an overriding impression will be left of action. These guys are doers, your backer will think, they look like they can deliver this plan.

So, who should be these six key managers? It depends on the size and nature of the business, but it should certainly include your firm’s heads of strategy (this will probably be the managing director in a small firm), sales and marketing (this may be one person in a small firm), finance and operations. In a larger firm it may well include your heads of technology, human resources and IT, as well as the heads of the most important business units.

Your backer will also want to know about organisation and governance in your firm. Here may be the place to include an organisation chart, kept simple and showing in particular who reports to whom in the top management team.

One paragraph on governance should suffice, unless yours is out of the ordinary. Who is who on the board of directors may be useful, especially if one or two play an important guiding role in the firm’s strategic direction, functional performance or networking.

In a start-up

There is no debate that management is a more important factor in a start-up than in an established business. It is crucial. You will not find any venture capitalist dismissing management as dispensable, as you may find in some buyout houses.

The earlier the stage in the investment cycle, the more crucial typically is management. The right managers are more important to the backer in seed capital (for the very early stages of a business, often proof of concept) than venture capital (for the early, high risk, high growth years of a business), and more in venture capital than development capital (for growth businesses with an established track record).

Many venture capitalists say that they back the person, rather than the product or service, in a start-up. If the entrepreneur has the right spirit, passion and dedication to their cause, they are well on the way to obtaining backing.

But this is a great oversimplification. As has been pointed out in earlier chapters of this book, first and foremost is the business proposition. The offering must have a sustainable competitive advantage. There must be customers prepared to pay the right price for it. If those boxes are ticked, and the entrepreneur is the right person, then the venture capitalist will get excited.

Note the use of the word ‘entrepreneur’, not ‘manager’. That is because the backer is looking for someone quite different in a start-up. They are not looking for a solid, steady, nine-to-fiver, with a proven track record of delivering to plan. They are looking for a visionary, a leader, a person who believes wholly in the product or service, who will inspire and motivate through passion, energy and darned hard work.

Think Branson, Dyson, Roddick. Or, on the other side of the channel, Jobs. Think Levi Roots, whom you read about in Chapter 5. But these are exceptional people – surely your backer can’t expect you to be like that?

Yes, they can, and they will. I have worked over the years with managers working in the least glamorous businesses you can imagine – from the pumping of sewage to stairlifts for the elderly and infirm – and have found leaders who genuinely convey passion to their employees, customers and other stakeholders. If they can do it, so can you. So must you.

If you are starting up a new business, you must feel and convey that passion. You may even possess the Celtic hwyl – the passion, spirit, fervour that can lift you to extremes of success (for further reading, try this author’s Backing U! A Business-Oriented Guide to Backing Your Passion and Achieving Career Success, Business & Careers Press, 2009).

But passion won’t be everything. As we saw for an established business, you must also be able to deliver. And in this section of your business plan, you must set out succinctly how you have delivered in the past. How you met the objectives set, whether by you or your boss.

As for the passion, don’t leave that just for the presentation. You may not get that far. The passion should shine through on every page of the plan. And when you do get to that presentation, let it rip.

Marketing

Your backer needs to know that yours is a market-driven firm. You make products or supply services to customers that fill an identified and researched customer need, and that convey definable benefits to customers.

And your backer needs to know that you will deploy a coherent array of marketing tools to ensure that customers are sufficiently aware of these benefits that they will purchase your products or services in sufficient quantities and at the right prices for you to make your plan.

Don’t make the mistake of confusing marketing with advertising. The latter is just one component of a component of the former.

Marketing is much bigger than that. It is a mindset. It is about the orientation of a firm towards serving the customer.

In a classic text, Basic Marketing: A Managerial Approach (Irwin, 1960), which has been much elaborated since, but not markedly improved, E. Jerome McCarthy set out four components of the marketing mix, the four Ps: product, place, pricing and promotion. This categorisation should more than suffice for this section of your business plan. It should contain a paragraph or three on each, as follows:

• Product – if your firm follows a differentiation as opposed to a low-cost generic strategy (see Chapter 5), show how it is the satisfaction of identified customer needs that has shaped your products (or services). Show too how product development, and also research, is oriented to meeting future customer needs – and does not exist in an ivory tower, presided over by boffins with little knowledge of or interest in the needs of the marketplace.
• Place – show which distribution channels are of greatest importance to your firm, now and over the next few years. Do you focus on direct sales or indirect, via agents, wholesalers or distributors? Why? How cost effective is your direct salesforce? What channels does the competition use? How does your ratio of sales to number of salespeople compare with that of the market leader? How have your online sales developed in recent years? To what extent have they cannibalised offline sales or brought in new business? What are the prospects for the future?
• Price – how is your firm’s price positioning relative to the competition? Broadly in line with the average, at a discount, at a premium? Why? How is this pricing aligned with strategy? How elastic are volumes sold in your business to price? What are the prospects for raising prices in line with inflation over the plan period? What are your assumptions?
• Promotion – what have been the main ways you have been promoting your products in recent years? Advertising (through which media – print, screen, radio, internet?), trade promotions, public relations, sponsorship, exhibitions, trade shows, seminars/conferences? Why? How will this promotional mix change over the plan period?

Finally, you should include here a word or two on the results of all this marketing. How satisfied are your customers with your product or service and with your performance? If you have undertaken any satisfaction surveys, here is the place to include the headline results. You may even include a one-page synopsis as an Appendix E – along with other marketing data you think might be useful evidence for your backer (for example, a breakdown of your marketing budget over the last three years).

To what extent is this customer satisfaction expressed in repeat business? This is the lifeblood of every business. The cost of winning a new customer typically exceeds greatly the cost of winning repeat business. If you have some good statistics on repeat business, set them out here. And emphasise how much better your ratio is than that of your competitors (assuming that this is the case!).

In a start-up

The questions are all the same in a start-up. But the answers differ in two respects. They are in the future tense. And they aren’t just important, they’re critical.

Marketing is the lifeblood of a start-up. If customers don’t know you exist, you’ll have no custom. You’ll be one of the thousands of companies that start up and disappear each year without trace.

In Chapter 3 of your plan you identified promising market demand prospects. In Chapter 4 you concluded that the competitive environment was favourable. In Chapter 5 you set out why your offering enjoyed a distinctive competitive edge.

Here, in this section of Chapter 6, you’ll set out how customers are going to be put in touch with your offering. It is crucial. It will require you to set out a detailed marketing plan in your Appendix E and summarise it here, convincingly.

It will show how each component of the plan will reinforce the other, how the customer will be bombarded with the same message, from different angles, different people, until they are eager to purchase your offering.

You’ll write this section of the plan with passion, even with some of the marketing hype thrown in. But your marketing plan must be sensible, rational and doable too. It must convince.

Operations and capital expenditure

This is the section for your chief operating officer, if you have one. Or for you again, if you don’t. Here you need to cover the main issues affecting your firm through the value chain, from the sourcing of supplies through to customer service. Remember that your backer doesn’t need to know the detail. They want the helicopter view in general and the ground-level view only when an issue arises which could have a material impact on your business plan.

In this section, you’ll consider the implications of your firm’s strategy over the next few years on the following aspects of operations:

• Supplies
• Purchasing
• Manufacture or service provision
• Research and development
• Distribution, storage and logistics
• Customer service and technical support
• Systems and IT
• Quality and financial control
• Regulatory compliance.

Under each link in the value chain, you’ll consider what resources are required to meet the plan.

And, of particular relevance for the next chapter on financial forecasts, you must set out the key items of capital expenditure needed to support the plan and beyond. State the following – in no more detail than is needed, but convincingly – for the major items of capital expenditure:

• The nature of the capital project.
• Why it is needed.
• The alternatives considered and rejected.
• How much it will cost.
• How long it will take to be implemented.
• What impact it will have on future revenues or costs.
• The risks associated with the investment.

Again, your backer doesn’t need to know about every item of capital expenditure, just the main ones – the value-impacting ones.

Supplies

Supply of raw materials can be a critical issue. If your company is a metal converter, making, say, aluminium car parts or wear-resistant cobalt cutting tools, your backer needs to know that the metal inputs to the production process are going to be available as and when you need them. And when the metal price goes up, as indeed it will, as for any commodity raw material, to what extent will you be able to preserve your margins through the pricing mechanism?

Metal converters are an extreme case. Few manufacturing companies, and no service companies, are as sensitive to raw material supply and pricing as a metal converter. But think of producers of plastics, glass and folding cartons – all are highly sensitive to availability and price of their key raw materials, respectively polypropylene (for example, and itself hugely sensitive to the price of crude oil), silica and cartonboard (itself highly sensitive to supplies of recycled and virgin pulp).

Think of an automotive manufacturer – sensitive to the price of galvanised, low carbon steel for chassis, but with a whole range of other suppliers, such as of seats, plastic fuel tanks and tyres, serving to spread the risk and limit exposure to the availability or price of steel.

The higher the proportion of cost from a single raw material in your business, the more your backer will need to know the detail. If you run a metal converting business, you should devote a page or two in your Appendix F to the pricing cycle of that metal over the last few years, highlighting the drivers behind each major upswing or downswing.

How dependent is your firm on the provision of supplies not just of one commodity but from one supplier? If that supplier fails to deliver, or exploits its bargaining power to raise prices dramatically, what options do you have for shifting to another supplier? To whom? With what switching costs?

If yours is a service business, don’t think this section doesn’t apply to you. It is likely that your main supplies will be people. But how easy is it to find people of the right background, qualifications and experience to replace employees who move on?

And even service businesses can be reliant on goods. A dental practice needs regular supplies of equipment, products and materials, not just hygienists. How reliant has an insurance broker become on its main software supplier? Can your building firm find sufficiently well-qualified, competent and enthusiastic plumbers?

Most businesses will have a range of supplies, a reasonable choice of suppliers and relative predictability in the cost of the supplies. But not all. Your backer needs to know where your business lies.

Purchasing

Supplies and purchasing used to come under the same heading in the old days. A manufacturer would purchase the supplies, convert them into some product, ship them out, sell them and provide service support.

Then along came outsourcing. Now every stage in the value chain can be outsourced. Manufactured modules can be bought in (or even the whole manufacturing process can be outsourced), transport operators contracted, distributors engaged, agents hired and service companies instructed.

And it’s not just in manufacturing. It’s the same with service companies. Insurance companies now outsource chunks of claims management. Banks outsource software development and payment processing. Prisons outsource prisoner transfer.

Whatever the sector, whether manufacturing or services, cleaning, maintenance, IT services and catering are often outsourced. Likewise customer service and technical support, often to offshore providers.

Today’s firm can often be seen as an aggregator of products and services, overlaid with design, management and marketing value added.

At every stage in the value chain, the firm can be a purchaser. Not just in supplies, but also in operations, logistics, sales and service.

How sharp is your purchasing capability? Do you consider purchasing to be a key success factor? If not, why not? How well trained is your team in negotiation?

Do your competitors buy their raw materials cheaper than you do? Even if their quantities purchased are of similar scale to yours?

What about the bought-in products in your manufacturing? Are they competitively priced? And logistics? Technical support? Customer service? Are you getting consistently good deals in your purchasing, relative to your competitors?

This section could be anything from one paragraph to one page, again depending on whether your firm’s purchasing capabilities may be an issue to your backer.

Manufacture or service provision

This is where you set out succinctly how you make your product or deliver your service.

If you are a manufacturer, where are your facilities? What size are they? For how long have you been there? What scope is there for expansion, and what constraints would need to be overcome (for example, in relation to planning permission)? What are the options if you have to move to another site? How do your facilities compare with those of the competition?

What are your main items of capital equipment? How have they changed in recent years? Where do they sit on the value/quality spectrum – are they the Rolls-Royce, the BMW or the Ford Mondeo equivalent in their field? What additional equipment do you need – as replacement or for growth? How does the equipment you deploy compare with that of your competitors?

What are your main manufacturing processes? How have they developed in recent years? Do you ask the ‘make or buy’ question at each stage of the manufacturing process? Which components or processes have you outsourced in recent years? What plans do you have for future outsourcing? What do your competitors do?

If yours is a service company, the same questions generally apply – except that you may be delivering your service from an office or a depot rather than a factory, the equipment deployed may be more computer-related than manufacturing-related (although many service firms, for example in dentistry, use highly sophisticated equipment) and your processes centre more around the movement of paperwork (or e-information these days) than goods.

Above all, how do the facilities, equipment and processes you deploy in providing your service compare with those of your competitors? What are you planning to do to stay ahead, keep apace or catch up?

Research and development

You will have already discussed product development in your section on marketing, earlier in this chapter. But here is the place to tell your backer a bit more about your research and development operations. How many staff, and what have they been working on in the last few years? How long have products taken to come on stream? How successful have the launches been? What impact have new products had on your manufacturing processes and equipment?

What products are currently under research and development? Are these new products or revamped versions of an existing product range? Are they being developed to meet gaps in the market? Define the gaps, and set out the timeline for launch and the implications for manufacturing and distribution.

Is your product line regarded in the market as being up to date, long in the tooth, somewhere in the middle? Or varied? What plans do you have to improve that positioning?

How extensive is your current product pipeline compared to the recent past?

How do your firm’s R&D capabilities compare with the competition? Who is recognised in the industry as the innovator? Are you more of a follower? Are you happy with that positioning?

In short, are there any issues with R&D that your backer needs to know about?

Distribution, storage and logistics

Set out here how your goods manage to get out of the factory and into the hands of the customer. What are the various routes to market? Do they go via a wholesaler or distributor? To an agent? Directly to the customer? A mix of all three? How has this changed in recent years? How will it change in the future? Why? What logistics do your competitors deploy? Does that work better or worse? What do you plan to do about it?

Again, only go into detail here if there is an issue that your backer needs to know about – for good, in that you want to demonstrate a competitive advantage, or for bad, in that you need to highlight a competitive weakness, albeit one that you are in the process of rectifying. That may well have cost implications – your backer needs to know.

Customer service and technical support

These are areas where, again, you must be candid and up front. If you’re not, you will be found out. Remember, your backer will probably insist on speaking to a few customers, and if your customer service or technical support is not up to scratch, your customer will seize the opportunity to tell it like it is.

It is not the end of the world if you don’t have the best reputation in customer service, in every place, for every customer, for every product line. It’s a trade-off. Customer service is expensive, so too is technical support. Often it is the largest player that has the best service and support, because it can afford to with its economies of scale.

I reviewed the business plan of a company recently that had superb technical support in one region, but very limited support in the region into which it wanted to expand – a key growth component of the business plan. The company recognised this and was assessing options for strengthening its capability via partnering with a service company in that region.

This was an issue for the backer, rightly recognised by the company and argued credibly in this section of its business plan. How is your customer service and technical support? Is it outsourced? Does it work well? And in relation to the competition? To the market leader? How can it be improved? What would be the cost implications?

Systems and IT

What are the key systems and IT you use in your manufacturing or service operations? How long have they been in place? What did you use before? How effective have these new systems been? How do they compare with the systems and IT of the competition?

What are the shortcomings of your systems and IT? How can they be improved? What are the cost implications?

I also worked recently on reviewing the plan of a global player in payments systems. Its systems were an acknowledged weakness and any prospective buyer was made fully aware that a major investment would be needed in updating the systems very soon after taking over the company. The backer needed to know and knew.

Your situation is unlikely to be so drastic, but are there any systems or IT issues that your backer needs to know about? Here is the place to lay them out.

Quality and financial control

Control is important to your backer. Even if things work out as per your business plan on market demand, industry competition, your strategy and plans for improving competitive advantage, can they rest assured that you have sufficient control over quality and finances that the whole thing won’t crumble?

What controls do you have in place for ensuring quality of output? And this question applies as much or more to a service business as to a manufacturer. How do your controls compare with those of your competitors? What is best practice?

And if something goes wrong in quality of output – think Perrier or Toyota – what contingency plans do you have to put it right? At what cost?

What financial controls do you have? How do you ensure that invoices are paid on time or very soon after? Can your controls prevent stockbuilding getting out of control if there is a dip in sales? How can you detect fraud at an early stage?

Again, if you feel that all is indeed under control, or as much as anywhere else in the industry, just refer to that here. There should be no need to go into the issue in great detail.

Regulatory compliance

This is similar to the above issue. Your backer needs to know that your firm is on top of all compliance issues – whether in the environment, in health and safety areas, which are of particular relevance to manufacturers, or in capital adequacy, which has become even more crucial in financial services following the crash of autumn 2008.

Taking environmental compliance as an example, what is your firm’s track record on compliance over the past few years? How has legislation changed in this period, and how have you responded? How does your response compare with those of your competitors? How may legislation change further in the future, and how will you respond? What are the cost implications?

Address similar questions in all major areas of compliance. If all is under control, say so here. If there are issues, set out what they are and how you will address them. If there are major issues, for example on the environment, detail them in your Appendix G and summarise them and their costs here.

Resource risks and opportunities

You have already pulled out the main risks and opportunities relating to market demand (Chapter 3 of your plan), industry competition (Chapter 4) and strategy (Chapter 5). Now it’s time to add the major resource risks to your plan, as well as resource opportunities.

These resource risks could relate to management (e.g. a key manager lured away to a competitor), marketing (e.g. an expensive advertising campaign that produces little benefit) or operations (e.g. distribution disruption if the new regional depot’s systems fail).

What are the resource risks that are at least reasonably likely to occur and with reasonable impact if they do occur? These are the big risks, as defined in Chapter 3. How can they be mitigated? What are the big opportunities? How can you exploit them?

We will return to these big resource risks and opportunities in Chapter 8.