Old thinking won’t work or as Einstein put it “We cannot solve our problems with the same level of thinking that created them”.
Here we will look at a Business Planning Tool Box; four tools/techniques that will enable a different and fresh approach to the way you look at your business.
The first is Zero-based budgeting. Rather than the historical approach to budgeting which involves small adjustments to expenditure on existing activities, Zero-based budgeting starts from the point that there is no budget for anything. It is rather limiting to view this as just a budgeting approach; it is a very useful business planning discipline. You can read more later…
Then we take a look from a different slant at the 80:20 rule. While in some areas of the business it is quite acceptable that 80% comes from 20% in other areas it is a criminal waste of valuable finite resources. It is not uncommon that 80% of revenue will come from 20% of the customer base; it carries its risks but those risks can be managed and minimised. However, if 80% of your marketing effort produces nothing or 80% of your hard fought for new businesses opportunities are lost due to poor selling technique it could kill the business. You can read more.
The Ansoff Matrix is an interesting tool for looking at your existing and potentially new propositions and how they might map to your current and potential new markets. As 2014 is going to provide many new opportunities it is a good time to consider whether you have become too narrowly focused on your existing markets and whether your existing propositions are just too safe. We look at a controlled approach to evaluating new propositions and markets for your business. More …
Finally the Boston Matrix. The Boston matrix focuses exclusively on your products and propositions and considers them in terms of the return they are making or could make to the business. It visualises a cycle tracing products from the early stage called “Troubled Child” where they are effectively at the level of R&D through the stages of Star, Cash Cow and eventually Dog when little or no profit is being made. Understanding the cycle and how to position your current propositions within it is a very useful planning tool. More …
Zero-based budgeting effectively asks the question “should we be doing that at all?”. So, for the moment, ignoring the fact that it will eventually help to produce your budget its real value comes when creating your business plan as it forces you to reconsider every activity measuring it against its value to the business. This is especially valuable at times, such as now, when we expect the plan period to be very different to recent previous periods.
The approach helps to free up thinking which allows new and disruptive ideas to be considered. For example let’s say the marketing manager needs £10,000 for a completely new activity. The typical response will be; what can we cut elsewhere to free up the funds? The problem with this is that the things we rob may be delivering good value but the reduction of funding may have a disproportionately negative impact on what they deliver. It would not be uncommon that the new investment, plus those robbed of funds to pay for it, all suffer and deliver less value to the business. When the focus of budgeting becomes “how little can we spend?” rather than “what value will we gain?” the result is rarely good for the business other than in the very short-term.
Each area of expenditure must be evaluated in terms of the return it will deliver for the business and this must then be measured against the potential cost. The first pass budget can now be created bringing all the areas of cost together matched against the expected income to be generated by the activities. If the figures do not produce the desired outcomes each area of expenditure must be re-considered in terms of the return it was expected to deliver as there is clearly something wrong in the assumptions made. The eventual outcome will be a balanced budget that will consist of funding for the most valuable activities in terms of what they will deliver for the business.
A useful technique to prevent functional protectionism is to have small groups, from mixed disciplines across the business, working on key budget areas. In this way it is more likely that things will be evaluated in terms of true value rather than the prestige they might deliver to the functional manager.
The 80:20 rule
Let’s cut right to the chase; if 80% of your marketing isn’t delivering, stop doing it. If the sales people are losing 80% of the potential deals they work on, look very hard at the deals and the sales people.
In the case of marketing I have heard it said “we know that XX% is working but not which XX%”. While this may have been acceptable 20 years ago when a significant portion of marketing spend was on advertising it does not wash today. Most marketing people that I know can tell you what return you can expect from a particular investment and they now have plenty of tools to help them monitor and measure the outcomes. One proviso; if the marketing person asks for £10,000 for a particular initiative and you decide to give them only £7,000, don’t expect to get 70% of the promised return; you might but you probably won’t.
Now to those under-performing sales people; this needs some detailed exploration to establish where the real problem can be found. It could be; a weak sales person, a difficult sales territory, excessive competition in a particular area or product line, overpriced products compared to competition, weak lead generation producing poorly qualified leads, inadequate induction and training or poor management and leadership.
There is no question that the problem needs to be solved but not before the root causes have been thoroughly investigated and the real problems identified. I have seen too many good sales people fail due to poor recruitment practise, inadequate induction and training and poor coaching and support in the field. If there are sales people who are really under-performing, action must be taken but a failure to identify the real issues may lead to good people leaving only to be replaced by another set of people who suffer the same fate. What a waste!
Combining the 80:20 rule with Zero based budgeting will provide a strong and reliable result.
The Ansoff Matrix
An Ansoff matrix provides a disciplined foundation for the process of thinking required to explore options.
A business can be positioned anywhere on the matrix and may well be in several quadrants at the same time but there are effectively four main strategies, each with its own level of risk. As is typical in life, higher levels of risk align with higher levels of potential reward. Consider the four strategies in the context of risk and reward:
Market penetration using your established offerings into your established markets. On the face of it this is the most predictable and lowest risk strategy. However, doing nothing different brings its own risks such as; growth slowing due to market saturation, commoditisation leading to downward pressure on margins, and the risk from new agile competitors.
Surveys typically show this strategy being the major source of revenue for most companies with the average across all industries and types and sizes of businesses being some 88% of total revenue coming from this source. This percentage typically gets higher during times of economic strife.
If this is where you plan to focus, a rational review and analysis of your current position can be facilitated through the Boston Matrix described later.
Product expansion with a new offering to established markets. This has the obvious benefit that the market is known and the established customers within that market will to some extent be sympathetic towards an established and valued supplier. Hence approaching established markets and customers with a new offering is the least risky option for trying something new. Established customers will be easier to sell to than new prospects and will probably be more forgiving if there are issues with the new offering but may well extract special terms as they are functioning as guinea pigs.
Market expansion; taking your established offering to new markets. As this is your well known offering there is little risk from this side of the equation as you know the current strengths and weaknesses and have plenty of experience of selling and delivering it to your established markets. So, the main risk comes from a potential lack of understanding of the workings of the new market so initial assumptions, goals and targets will need to be reviewed regularly whilst learning the new market and how your offering now fits.
Diversification with a new offering to new markets. The new offering could be the result of you developing something new or by taking on an agency or re-seller arrangement for a new solution. If it is something you have developed then although new in terms of a proposition to market you have the knowledge and experience gained from developing it. If the new offering is something you have taken on then your knowledge of the offering is at its weakest compared to all the other scenarios.
The Boston Matrix
The top right quadrant is the home for your new and probably troublesome ideas; new products, services and solutions. If you are thinking of using off-shore delivery for the first time, this would be a good candidate for the “Troubled Child” category.
The top left quadrant is, as its name implies, where the really good ideas have evolved into valuable offerings; high value, high margin, little completion and customers just love it. Milk it as long as it lasts because in most cases changing market sentiment and increasing competition will eventually drive your Stars into the Cash Cow quadrant. This is no issue as you should by now have got back all the start-up investment, made a very good surplus return and you now have a robust low maintenance offering that “sells itself”.
The thing to beware of is the move to the final quadrant “Dog”. The term (no offence intended to dog-lovers) in US business speak, implies the things in this quadrant are no longer of any real value to the business, are producing low returns, may be becoming troublesome to maintain as relevant skills are in short supply and may start to damage your brand reputation. Time to withdraw the product, or perhaps sell off the division.
The two quadrants that are really of interest are Star and Cash Cow. Troubled Child is the feeder to them and Dog is the exit door so focus your energies on the other two.
Using Ansoff you might find a different market where a Dog or Cash Cow will have a better time. Using the 80:20 rule will help you to expose those products and propositions that might have moved to a different quadrant without you noticing.
Taken together these four tools support a very robust business planning approach which is especially necessary in times of great opportunity such as now.