The Business Plan
It’s the third week of August. The work week in the Philippines actually began with a legal holiday punctuated by driving rain. In North America, Monday was marked by a total solar eclipse. In the meantime, the rest of the business community continues to work on business plans.
Of course, the phrase business plan can mean different things to different people. In particular, we differentiate between the strategic and operating plan created primarily for internal consumption by going concern businesses and the business plan created with the primary purpose of gaining funding.
For most corporations, the annual cycle of planning is really part of the strategic management cycle. It involves a review of external and internal situation, including how the current strategy is faring, a decision concerning corporate direction and then a recrafting of operating plans and budgets in order to support business direction.
The output of this process has two basic objectives: driving direction and creating alignment. One of the most important functions of a business plan is to clarify corporate direction. The entire company needs to be clear about corporate positioning, and key goals and strategies. This clarity concerning direction sets the foundation for creating organizational alignment, which is essentially about aligning organizational resources and effort.
In the management classroom, we also talk about vertical alignment (alignment between the many levels of the organization) as well as horizontal alignment (alignment between the different units of the organization). Part of this challenge of course is creating a common language and understanding. The other part of creating alignment is about creating policies, structures and systems that ensure alignment.
In the AIM strategy classroom, we often discuss how strategy creates alignment. In my classes, we explain that strategy creates alignment by providing the answers to the five basic questions.
The first question is one of direction. What is our objective? This is typically answered by at least three things: the organization vision, the organizations long-term objectives (typically short-term and medium term), and the organization’s key metric (the one important goal that will drive corporate success in the medium term)
The next three questions deal with market clarity. Who is our customer? What are we offering to the customer? Why would the customer buy from us?
The second question deals with clarity in our target market segment and should be more than about the customer’s socio-economic class. The answer to the question of who is our customer must be precise enough for managers to understand both how to find our customer (where is our customer?) as well as how to determine whether a potential customer is indeed part of our target.
The next two questions are a matter of the corporate promise. Question number three sounds easy but is not. Very often, we believe we are offering a product when the larger part of our offer is really a service. Question number four is even more difficult. It addresses core value proposition and requires an understanding of at least two things – what is driving demand as well as what is driving preference. For example, perhaps I am choosing a restaurant primarily as a location for a meeting. In this case, my criteria for choice (preference) would be very different from my criteria for when I am choosing a restaurant for a family gathering.
The final question is the one that is often the most difficult. How do we deliver to our promise? We must deliver in a manner which satisfies the customer and ensures that the organization prospers over the long-term. This is a matter of effectivity as well as efficiency.
One of the most important concerns of strategic management is to create alignment without sacrificing flexibility. Businesses today need to grapple with quick changes as well as with micro-markets. Both require the ability to flex the basic business strategy without sacrificing key elements of positioning.
Budgets, organization structures and authority matrices are a key part of creating alignment. These tend to be the more rigid elements of alignment. The danger in every organization is that too much rigidity can kill an organization’s ability to deal with localized situations or rapid changes. Too much flexibility, of course, can create runaway costs or even expose the company to major fraud.
Creating flexibility while ensuring alignment involves being clear about what things must be the same. One useful way to think about this comes from Collis and Rukstad, who in a 2016 article in the Harvard Business Review, explained that there are three key elements that must be clear in communicating strategy: objective, scope and advantage. The authors discussed two elements within the category of advantage: value proposition (especially versus key competitors) and the set of activities required to deliver the value proposition. It is, of course, this last item that is often the most difficult for managers.
In any case, the main audience of this kind of business plan is essentially internal. Its purpose is to inform the organization about direction and priorities. This internal business plan is the basis of what is then communicated to external stakeholders.
By contrast, the term business plan, as opposed to strategic plan or operation plan, is, not always, but often used to connote the plan that is crafted primarily for engaging potential investors.
The key purpose of the business plan is to create clarity and confidence about the business opportunity, the fit between the business opportunity and the proposed solution, and the ability of the proponent team to deliver the proposed solution profitably and at scale.
In either case, the heart of the business plan is about three things: fit, logic and clarity.
Readers can email Maya at [email protected] Or visit her site at http://integrations.tumblr.com. For academic publications, Maya uses her full name, Maria Elena Baltazar Herrera.