Session 2

1. Session 2 PLANNING

2. Planning is considered an important process in the successful management of organisations. • Planning involves the 3-stage process of determining ‘where are we now?’, ‘where are we going?’ and ‘how to get there’. • The conventional view is planning is important in the SME sector. • Entrepreneurs may not develop a plan and instead adopt a more informal approach. Session 2

3. Planning Philosophy • Concept of plan is set objectives and define processes to achieve these aims. • Alfred Sloan CEO of GM Corporation used structured planning to manage a complex, multi-divisional corporation. • The concept accepted, is taught in Business Schools and used in large organisations. • Its principles are grounded in scientific management and classical management thinking. Session 2

4. Evolved into strategic management theory. • Seen as beneficial for coordinating policies within diverse or complex organisations. • Permits in-depth review of future. • View that planning process important has extended into the SME sector. • Most support service programmes have business planning as a fundamental component of achieving success. Session 2

5. External environmental analysis Internal organisational environment analysis Where are we now? SWOT Where are we going? Objectives Business strategy Operational plan How to get there? Financial plan Control system Figure 2.1 Standard business planning model Session 2

6. Planning Process • Standard model is a linear, sequential process. • Length and structure of a formal document less critical than ensuring it covers the 3 issues of: • ‘Where are we now?’ • ‘Where are we going?’ • ‘How to get there?’ • Starting point is a review of the current situation external and internal to the organisation. • Analysis provides basis for SWOT. Session 2

7. Management texts may propose multitude of objectives. • The reality is that objectives need to be measurable, feasible and achievable. • Meeting these criteria tends to limit objectives to quantifiable financial aims. • Strategy specifies how the organisation will operate in the market to out-perform the competition. • Strategy is executed through functional marketing and operational actions. Session 2

8. Entrepreneurial Commitment • James Dyson studied design and first assignment was to develop new type of boat, the Sea Truck. • Learned lessons of: • Recognise when design wrong and act immediately • Never start an under-funded project • A customised solution is better than generalised one • Dyson started own business to develop and market ‘ball barrow’ which was wheel barrow in which a ball replaces the wheel. Session 2

9. Dyson’s sales manager joins a US company which starts to manufacture a copy. • The board, against Dyson’s wishes, started a lengthy and costly law suit. • Dyson moved on to design a vacuum cleaner which has better suction by not having a bag to collect dust. • 5,000 prototypes later, Dyson creates his ‘bagless’ vacuum cleaner. • Dyson searches for investors/partners, some of whom try to steal his technology. Session 2

10. A Japanese firm agrees to manufacture for their domestic market and pay Dyson a royalty. • Eventually Dyson raised sufficient funds to launch Dyson Appliances. • Contracted with Philips Plastics to manufacture product. • Philips create problems which eventually forced Dyson to sue them. • In 1995, Dyson decided to open own factory and became UK market leader in 12 years. • Company subsequently expanded into over 15 major overseas markets. Session 2

11. Dyson strategy to market superior quality at a higher price. • Strong faith in word-of-mouth recommendations by satisfied customers, plus effective use of PR campaigns. • Committed to high R&D spend (15% of sales versus industry average of 3%). • Decision to keep key design and R&D in-house, but be prepared to outsource other activities if more cost effective. (Machines now made in Malaysia.) Session 2

12. Dyson’s philosophy: • Ideas cannot be drawn: make prototypes to stimulate creativity • New technology only new if can be protected via patents • Believe in yourself • Keep testing and retesting until personally satisfied • Continue to re-think, re-design, improve • Challenging conventions requires stamina • Ideas should be managed from start to finish by originator Session 2

13. Planning Benefits • Conventional view of ensuring success and/or avoiding actions leading to failure. • Researchers have produced studies validating benefits of planning in SME sector. • Perspective reflected by importance/weight given to process in education and training programmes on small business management. • Somewhat concerning that even in large firm sector, relevance and effectiveness of business planning can appear questionable. Session 2

14. In most business start-up support training schemes, over 50% of content is focused on developing a business plan. • Added emphasis, due to banks requiring plans when making small business loan application. • Plans definitely help professional advisors and financial institutions gain an understanding of the business proposition. • A plan also provides performance data that creates benchmark against which to assess actual performance. Session 2

15. Venture capitalists’ experience is that the more charismatic effusive entrepreneurs less likely to provide plan at beginning of search for investors. • A venture capitalist often has to work with the entrepreneur to develop a plan to increase the chances of successful search for capital. • Even having proved benefit of planning, owner/managers tend not to use the plan as a control system to monitor actual trading. • Research supports the idea that, under certain conditions, even small firms genuinely benefit from having a plan. Session 2

16. A plan is very useful when business and/or market is stable. • Also useful when market is mature and a dominant technology is in use across an industrial sector. • Can be beneficial when assessing implications of proposal for significant capital expenditure. • Researchers also acknowledge that use and benefits of plan is influenced by personality of owner/manager. • ‘Charismatic entrepreneurs’, passionate about business proposition and own ideas, are difficult to persuade to produce a plan. Session 2

17. ‘Pragmatic entrepreneurs’ adopt a more conservative attitude and will not commit resources without a plan to assess opportunity. • Other benefits of planning include: • Forces an assessment of the market • Forces an assessment of the firm’s internal operations • Quantifies expected financial performance • Identifies scale of resources required • Identifies scale of any external borrowing needed • Provides ‘road map’ for implementation • Although such perspectives may be acceptable to many, entrepreneurs may still reject the idea. Session 2

18. Famous inventors often rarely had plan, just convinced their idea would succeed (e.g. Thomas Edison, Steve Jobs). • Even in case of a new firm developing a new invention, small firm advisors find a plan: • Assists when firm needs to attract significant new capital • Assists understanding of senior staff as firm moves from autocratic leader to become team-led entity • Assists when founder is facing need to plan for the successor. Session 2

19. Plan? What Plan? • In 2003 Tom Anderson had the idea (but no plan) for a Website where unknown Indie bands could feature free on videos and other materials. • He and Chris Dewolfe created MySpace and initially toured music venues to persuade bands to use the site. • Early example of the power of an on-line social network, in 2 years they had 14 million site visitors. • Nike and Sony quickly recognised that MySpacegave them access to the 16-34 age group, and so purchased advertising space. • The founders sold the business to Rupert Murdoch’s News Corporation for $580 million. Session 2

20. Is A Plan Needed? • In a study to determine the role of planning in an entrepreneurial business, the Canadian academic Professor Minzberg researched Steinberg, a major retaile. • In 1917, Mrs Steinberg opened a small shop in Montreal, Canada. • Son Sam worked in store and when Landlord asked him to do a FOR RENT sign in the next door shop, Sam rented the store to expand his parents’ business. • By the time Sam Steinberg died in 1978, he had built a business with annual sales of over $1 billion from 191 supermarkets, 32 department stores, 119 restaurants, 25 shopping centres and a food processing operation. Session 2

21. Between 1919 and 1929 Steinberg only opened two stores. • They began to expanding in the 1930s, initially to create employment for family members. • In 1933, following massive loss at a new store, over a weekend, Sam changed its name to Wholesale Groceteria, slashed prices and removed most forms of customer service. • His new strategy was that of being Canada’s first self-service, discount-priced supermarket. • Success caused him to change all other stores to use the new concept. Session 2

22. Instead of renting stores, he started using mortgage finance and buying up land for future developments. • During the Second World War, rationing and price controls meant no opportunities to expand. • In the 1950s, Sam boasted he had never needed any non-family investors. • His standard response to the question about his future plans was ‘Plan? Who knows?’. • Then, in 1952, he announced a 5 year$15 million expansion programme, but rejected selling any of the family shares. Session 2

23. He eventually floated a $5 million debenture, but to obtain these funds the lenders insisted that for the first time ever, Sam had to provide a business plan. • The financial community also applied pressure, wanting more a formalised management structure and more experienced senior managers recruited from outside family. • In 1955, pressure for more capital required Steinberg to go public, but none of shares issued had voting rights. • In the 1960s, he expanded into Ontario by buying the Grand Union store chain. Session 2

24. A poor acquisition that never proved successful. • Sam was pressed into delegating business operations to his professional management, who embarked on a massive expansion and diversification programme. • By the late 1960s, management’s response to economic downturn was slow and ill conceived. • Eventually they attempted to repeat Sam’s 1933 strategy under the ‘Miracle Pricing’ banner, slashing prices, stocking only basic products, and cutting back on advertising and staff levels. • Actions did partially rebuild company’s market position. Session 2

25. Sam campaigned for power to be returned to store managers, to speed up market response to change. • By the 1970s, Sam was getting old; he failed to find a successor from within the Steinberg family. • In a period of high inflation and labour unrest at time of Sam’s death, the company was involved in a series of disastrous strikes and lock outs. • The situation exacerbated by feuding within Steinberg family, and in the mid-1980s company was taken over. Session 2

26. Conflicting Evidence • Some research shows strong correlation between SME performance and the use of a business plan. • Other research has been unable to reach such a definite conclusion. • A number of factors probably influence this variation in outcome. • One reason may be that the quality of SME research is somewhat varied. • SME research is still a relatively new field, and takes time to attain professional standards of research. Session 2

27. Common research methodology problems include: • Biased sample frame of owner/managers attending a business planning course • Sample frame drawn from different industrial sectors, but no attempt to analyse sector variation • Sample frame includes businesses ranging in size from 1-person operations to 200+ employee firms • Poor design of survey using tools or non-validated survey method • Tendency to look at a small specific situation and then make generalisations about entire SME sector • Research based on observing actual owner/managers in action usually reveals limited use of business plans. Session 2

28. Beaver concludes logic would suggest strategic planning appears important but generalisations ignore influence of (a) different situations facing small firms and (b) owner/manager personality. • It probably would help many owner/managers to use a plan to clarify their thoughts and ideas. • Problem among entrepreneurs is a preference for action over reflective thinking. • Where numerous unanswered business questions remain, the entrepreneur might want to spend time planning. Session 2

29. It is vital that small business advisors accept that the classic linear sequential model has limited appeal to most entrepreneurs. • Anderson and Atkins identified two styles: • ‘Butterfly planning’ where entrepreneur deliberately experiments with/analyses various scenarios. • ‘Lottery planning’ where entrepreneur selects scenarios to review on random basis. • These researchers conclude entry and exit point in the planning process can vary. • The tendency is to actually plan by drawing from a menu of actions involving some or many of the relevant components contained within the linear sequential model. Session 2

30. Current Market Current Capacity SWOT CURRENT SITUATION Current Strategy Current Objectives Future Objectives FUTURE SITUATION Future Market Financial Forecast Process / Production Plan Future Capability Future Market Marketing Plan Action Plan Figure 2.2 Possible components in an entrepreneur’s approach to planning Session 2

31. Planning by Trading • It is often difficult to assess the real opportunity for a radically new idea. • Market research is of little benefit because potential customers have little or no understanding of scale of need. • Chad Hurley and Steve Chen worked at Paypal. • They became frustrated by their inability to use mobile phones to share self-recorded vacation videos. • Worked in Hurley’s garage and launched YouTube in May 2005 with 30 video clips (mostly of Chen’s cat). Session 2

32. No real market impact, but existence of MySpacemeant people had experience downloading audio-video materials. • In December 2005, somebody posted a clip from an NBC programme. • Word-of-mouth generated numerous hits to see clip. • Then people started posting crazy clips (e.g. Chinese students singing rap), and rapidly YouTube became the site teenagers went to for entertainment. Session 2

33. Site not suited to conventional banner or pop-up ads. • Nike posted a short video of a Brazilian footballer which generated 20 million views. • Global audience of over 100 million represents a huge opportunity for on-line advertising. • Google™ saw potential, and bought business for $1.65 billion. Session 2