Writing a Business Plan: External Analysis

In a perfect world, you could just work out the business you wanted to create, identify the amount of productivity required to make a good profit, and set things in motion. In this world, however, there’s quite a bit more than that involved, and most of the problems that remain at this point in the project are going to be coming from outside the company itself. An external analysis (also known as an environmental analysis) considers all of the factors beyond your immediate control; some of these may be positive, many of them will be negative, and some are just the nature of your business. But as with all of the other sections that make up the business plan, the key here is explaining all of the different people and things that have the potential to impact your new company – and how you plan to deal with them…

If you completed a Five Forces analysis during the research phase this would be an excellent time to pull out those issues and the answers you came up with. First of all, how will you manage the competition from other firms that do what you do? If you’re introducing a completely new product or service there may not be any direct competition when you begin operations, but you can generally assume that there will be some as soon as you have your first profitable quarter. How do you expect to gain market share over the companies already in your field, and how will you hold onto that share in the face of direct competition? Even if your potential investors didn’t want to know about that (and they probably will) you still need to work that out before you begin operations…

You should also have some idea of how you intend to manage your interactions with vendors and suppliers. If you are unusually fortunate all of your interactions may be fair and friendly, but it’s much more likely that your vendors will have some amount of influence on you, depending on how much you need each one of them, and how many possible sources you have for each need. It’s also possible (although much less common) that you will be one of a very small number of customers some of your suppliers can count on, and that you will be able to exert leverage on them. Of course, similar comments apply to your relationships with your own customers; your external analysis should map out how you plan to manage these issues – or eliminate them where possible…

Then you should consider how new forces could your business model from outside your immediate environment. The obvious one is new competitors, and here again, even if no investor ever asks you to account for how you intend to deal with them, you need to work out in advance what will happen if somebody opens a new business in your industry (or geographic area) and starts competing with you. Almost as important, however, is the question of what you intend to do if some new technology, process or legislation makes it possible for someone to create a substitute for your product or service – something completely different that can be used for whatever your customers expect to gain by doing business with you. If that happens, how are you going to deal with it?

You should round out your external analysis by covering anything else external to your company, such as local taxes and permit costs, size and composition of the workforce from which you will draw your employees, climate, customer demographics, cultural traditions, and anything else that might impact your operations. Keep in mind that no one has ever been able to account for everything that might fit into this category, and you probably won’t be the first, but if you’ve done your homework you should already know all about the industry you are breaking into, the geographic area in which you will operate, the legal systems, monetary systems, governmental systems, demographics of your workers and your customers, and a thousand other details. You probably don’t have to cover all of the minutiae, but take a moment and think about all of the things you’d want to know if it was your money that would be going to finance this venture – because very shortly now, it will be…

Writing a Business Plan: Operations

Most people assume that the Operations section of the business plan will be the easiest one; after all, you’re just telling the reader what you are going to do. And, unless you are making a bold entry into an industry in which you have never worked, you probably know a great deal about what your new business will do and how it will do those things. Unfortunately, this is where most business plans break down, and also why: YOU know what your company will do, in great detail, but your reader doesn’t necessarily – and your reader is the one who decides if you get the resources you’re asking for. Let’s go over some of the critical points you will want to include…

First, you will want to complete the classic “W5” questions that any reasonable person would want to know before offering anything to your new venture; you’ve already answered What you want to accomplish (the Mission statement) and probably Why (the Vision statement), but now you need to address where, when, and with whom you will do these things. So tell us: where are you going to set up operations? Do you have a location (industrial space, retail space, a suitable vacant lot) picked out? If so, tell us what makes that location ideal (or at least optimal); if not, tell us how you will find one. If you’re going into retail or food service location may be your single most important factor; if your operations are entirely online you may only need access to high-speed Internet connections and a post office. Either way, you need to explain where you’re setting up shop…

Then you should consider when you will start operations, and how much lead time you will need to get ready. We’ve talked about critical path management (CPM) in this space before; it’s the process of working out which steps in your development have to be completed before you can continue (and which ones can be completed concurrently while you get to that point); we’ve also discussed the use of a Gantt Chart (it’s not an acronym; the chart is named for its inventor, Henry Louis Gantt) which lays out the critical path graphically. As usual, neither technique is mandatory, but you will find this part of the plan much harder without them or the equivalent…

With whom is also critical; you will need to lay out how many people you will need for each of the company’s functional areas; if you are planning a divisional structure you should discuss each division separately, and if you are planning for multiple shifts you will want to consider how many people (and which ones) will be on each shift. Some departments (payroll, sales, PR) may not need a second or third shift; others might increase your profits assuming they don’t cost more to operate than you will make during those hours. You should probably include details about benefits, salaries and employee retention plans that you’ve already worked out, although those aren’t as important at this stage…

Once you’ve completed all of those details, it’s time to get into what company operations will actually accomplish. What we’re looking for here is an overview of how the company will go about its daily (and monthly/yearly) operations; how many people, doing what tasks at how many workstations, producing how much product out of how much raw material. If our day shift employs 100 people to run presses and lathes on five different production lines, each of which can turn out 250 widgets each day, then we need to explain how much we can sell 1,250 widgets for, how much the raw materials for 1,250 widgets will cost, and how much we will be paying our 100 operators. If we expect to start a swing shift after a year or so (once we’ve had time to train up supervisors and foremen) and a night shift after two years (if there’s enough demand to support one) we need indicate how much additional input and output we expect, and we should also discuss how we will train and promote new management personnel, as well as any additional facilities we will need to handle the increased workforce (and output)…

Finally, this section should discuss your plans for the future. Do you plan to expand at some point; are you going to move into other products or services, other geographical areas, new products or new technologies? You don’t have to account for all of the possibilities now – especially if there’s a possibility of game-changing technology emerging in your industry during the foreseeable future – but very few of us intend to just set up shop and perform the same operations until we retire. Once you have accomplished all of the things you’re planning to do, what will you do next? This is especially important if you are bargaining for an equity share in your business (e.g. selling stock or taking on silent partners) as opposed to just borrowing money that you promise to pay back – but that’s a discussion for another day…

Not Quite What They Expected

We went by Jack-in-the-Box today to get a quick bite of lunch, because we were out running errands and our daughter really wanted some J-Box food (they don't have J-Box in Atlanta, you see). I should probably explain that the kids are in town for a visit, and we've all gone to Apple Valley, California to see the in-laws. There was a Jack-in-the-Box on the way back to their house, and we pulled through the drive-through window for some take-out...

It was the first time I had been to a J-Box since they started their "We Won't Make It Until You Order It" promotion, and I had actually been wondering how it would work with the drive-through operation. Well, today we found out. Frankly, I don't think the company had thought this one all of the way through before they launched it...

After we placed our order and drove around to pay for it, they asked us to pull into the parking area in front of the building while they cooked our food. This allowed them to keep taking orders (and money) without having us blocking their driveway. We settled into the parking lot with five or six other carloads of drive-up customers and prepared to wait...

It wasn't actually all that long to wait, but it seemed like forever, what with the High Desert summer heat (102 in the shade) and the fact that they got our order wrong and we had to wait while they remade it. Which is exactly what I was worried about, in fact. The big problem with this promotion is that the heart of any fast food operation is convenience, and waiting around in the parking lot while your order is being cooked isn't what you would normally call convenient...

I'm sure it seemed like a good idea in the conference room at Headquarters when the Marketing department presented it. Jack-in-the-Box has been using a "High Quality" strategy for years; attempting to position their products as the best available by the (admitted low) standards of their industry. What could be better than shedding the most entrenched negative image of fast-food operations: pre-made food waiting in a bin under a heat lamp (often for hours at a time) before you get it? Unfortunately, marketing personnel are often a bit disconnected from the realities of the firm's operations, and in this case I have to ask if the marketing people had ever seen an actual Jack-in-the-Box restaurant before they launched this particular promotion...

The change in food preparation doesn't require any major changes to the restaurant, although I expect ripping out the warmers and adding more grill or fryer or preparation space would have been helpful, and hiring more cooks would be important on busy shifts. Nor would the customers dining in the restaurant be affected, particularly. But changing traffic control (or "customer control" as it is sometimes called) procedures for the drive-up window would require lengthening the drive-through lane, dramatically speeding up the rate at which food can be cooked, or asking people to pull out of the drive through and cool their heels in the parking lot -- only the last of which is really possible. And this is where the "We Won't Make It" promotion falls flat...

I don't have any easy answers for this problem, either. Rebuilding all of the company's retaurants seems prohibitive, and there is no way to cook food any faster than they are already doing it. But backing off from the promotion would be disasterous, costing them thousands of sales in lost prestige and giving the competition the chance for a field day. On the other hand, I think we can all learn from this example: the next time Marketing comes up with a brilliant new promotional campaign, you might want to ask the operations people if they think they can make it work. And if at all possible, ask some of the operations people based down near the pointy end what they think of the concept...