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Integrative Business Planning – A Case Study On Insufficient Planning

Introduction

Entrepreneurs would always do some form of business planning before they start a new venture. Quite often this will result in a formal business plan. The format will probably be determined by one of the following:

  • A business planning software package;
  • A guidebook on business planning;
  • Another business plan;
  • An external consultant.

Although all the above can have satisfactory results, they all have potential pitfalls. One serious pitfall (when using one of the first three methods) is the way that the entrepreneurs tackle the problem. Although all of the methods cater for the addressing of the apparent salient features and even for the interdependence between them, they can not cater for all the intricacies and multi-directional relationships that exist between various features in a business.

Outsourcing the whole business planning process to a consultant also does not solve all the problems. A consultant would need to work quite interactively with the entrepreneurs to be of real value.

Over more than a decade Ventex Corporation advised and assisted companies from business planning right up to harvesting and beyond. This case study highlights the importance of having a well thought-out and executed integrative business planning process. It shows how apparent small issues, that are neglected in the planning process, can have grave consequences for the entrepreneurs.

Salient Features in an Integrative Business Planning Process

The first aspect of integrative business planning is to ensure that all the salient features are catered for. These features can differ drastically from one business to another. Some of the more general features are:

  • The Business – The opportunity, the business concept, products and services and growth strategy.
  • Marketing – Marketing strategy (price, promotion, etc.).
  • Market Research - Customers, market size, trends and competition.
  • Development - New products, services, markets and facilities.
  • Operations - All aspects.
  • The Team - Management team, skills needed, training, board composition and organisms.
  • Finances - Investment-, financing- and dividend decisions and policies. Also cashflows, profit margins, costs and growth.
  • Risk Management - Business-, operational- and financial risks as well as potential fatal flaws.

Multi-Directional Relations to Keep in Mind in Business Planning

Unfortunately the salient features can not be seen in isolation. Every feature impacts on various other features and are also impacted by many other features. These multi-directional relationships occur within each individual broader feature (e.g. finances) as well as between different features (e.g. between finances and marketing).

Higher profit margins can for instance decrease the volumes sold, but increase the net profitability. On the other hand can higher volumes (with lower gross margins) increase the volumes sold, but decrease the profitability.

Higher volumes on the other hand can increase the stress factor in production personnel (that already work at maximum human capacity), causing higher absenteeism, lower production levels, extra hiring costs and a corresponding decrease in profitability. Unfortunately these intricacies can not be ignored and an integrative approach of business planning goes a long way in handling it.

An Example of Things that can go Wrong

Ultimate Holidays had a very ambitious business concept in the tourism industry. The industry was booming at the time and they planned in detail to build a luxury lodge that would combine a health hydro, hotel school, conference facilities, adventure center and eco-cultural tourism. (Details are changed for confidential purposes – all the detail does, however, simulate the real-life scenarios close enough to demonstrate the actual learnings).The experience of the entrepreneurs includes business, entrepreneurship, tourism, archeology, law and politics. This project of around $320 million was a life-long passion for all of them. They covered in-depth the architectural designs, legal requirements, development and operational planning issues, the marketing plan and personnel development policies. They also ensured that they had senior politicians and excellent service providers on board.

The business did, however, never got of the ground. What did the experienced entrepreneurs not see? What could they have done differently? They thought they had covered all the various aspects of the business. Analyzing the facts, the following major problems stood out:

  • The entrepreneurs were not flexible – they had strong pre-conceived ideas;
  • No detailed market research was done. Specifically not on occupancy rates in the niche industry and on critical investment criteria that investors are looking for;
  • All the planning was done on individual aspects that were optimized as far as possible. The way that these factors might have effected other factors were never considered.

The entrepreneurs were quite arrogant. They believed that any entrepreneur would be stupid not to invest and they would typically say that they only want investors that share their dreams and that the finances will sort itself out.

The business plan promised a “conservative” 22% internal rate of return (IRR) over a seven-year period. This included the expected capital growth of the facility. Expected occupancy rates were given as 50% in year one, rising to more than 75% by year four. The IRR and occupancy rates were much lower initially and were purely based on thumb-suck. The entrepreneurs then just chanced the figures to make financial sense without changing any of the other related factors.

Investors were often very keen on the concept, until they realized that the occupancy rates were inflated. The real figures based on realistic values indicated an IRR of only 15% – at least five percent below what the investors expected. The financial risk was just too high. Furthermore a breach of trust occurred.From the entrepreneurs’ viewpoint this was an insurmountable problem – they wanted it their way. In the end nobody invested. Much effort was applied and personal expenditures were sky-high. A high visibility in the business and tourism industry was also created. In the end some of the entrepreneurs were financially (and emotionally ruined) and all of them lost credibility.

The important questions in hind-sight are: Could the entrepreneurs saved this project? Could they have included all the features and genuinely expected an IRR of above 20%?

If the entrepreneurs used an integrative business planning process, they would have first ensured that all the salient features were examined. Secondly they would have ensured that all the multi-directional relationships (causality) between the different features were balanced.

By mapping the relationships between the various salient features it showed for instance that:

  • Occupancy rates are caused by service levels, product offering, marketing and price.
  • Occupancy rates on the other hand can affect the turnover, profitability and marketing (through word-of-mouth).
  • Profitability is caused by turnover (through occupants and outside guests), occupancy and cost of doing business (cost of sales and other expenses).
  • Profitability on the other hand have a direct bearing on the IRR, cashflow and sustainable growth of the business.

Only a very small portion of the multi-directional relationships that exist within and between the various salient features are shown above.

The entrepreneurs should have asked more in-depth “what-if” type of questions. They could start with questions such as: What would happen to the occupancy rate if the price per night increase by 10%? What would happen if the various aspects of the business are phased- in? Would it be possible to cut marketing costs and increase the occupancy rate? The last question typically seems like an oxymoron. This is part of integrative business planning – to look at the two opposites and try and find a solution where both aspects are catered for. In practice this can probably be achieved by using more free advertising in newspapers, internet articles and blogs and by working directly with the tourism associations of the region.

A major aspect (constraint) of this whole new venture was the high capital lay-out. By concentrating on this salient feature it was shown that costs could have been drastically reduced without having any detrimental effect on the occupancy rate. By using a light steel frame construction instead of the normal brick could have caused tremendous savings. The erection time could have been halved with savings in labor and interim interest. The long distances would have resulted in much less transport costs (light steel frames are much lighter than brick). Additional savings are also possible due to other construction benefits and different finishes. No negative effects would have been foreseen.

The building costs of the health hydro was 50% of that of the main complex, but the projected figures showed that it would only produce 33% of the turnover of the main complex (at much lower gross profit margins). This component could have been phased-in at a later stage when the complex was already in full production and when the potential occupancy and profits were much higher.

The analysis of the business showed, that by just changing these two factors (construction method and phased-in hydro) and by using a realistic occupancy rate, that the expected IRR will be in excess of 21%. Further solutions to decrease capital expenditure could have been explored and this could have resulted in a further increase of the IRR. The high road building costs (to the complex) could possibly have been shared with the government and other potential developers (e.g. of a shopping complex or a time-share game farm close by).

Summary

By neglecting some of the salient features or by not acknowledging and planning for important casualties can be problematic or even fatal for a new business. All the salient features need to be covered and at the same time the multi-directional relationships between them need to be balanced. One aspect of the business can not be optimized to the detriment of some of the others. An integrative business planning approach is needed to find the optimum balance for the company as a whole.

Copyright© 2008 – Wim Venter

No Internet Business “Model” – No Internet Business

If you don’t have a business model, you don’t have a business! At least you won’t have one for long. A business model forms the foundation for your business. Yes, that includes internet businesses too. Without a good rock hard foundation your business new or old will come crashing down!

A very good model will take into account “all” the basic needs and requirements of your business or any business really. Unfortunately, most people who start up a business don’t find out their needs and requirements until it is too late or until they have already lost a great deal of money. This is why a very large percent of businesses go under and go under fast, especially internet businesses. It appears the general mindset for many of our internet business pioneers is that once they get their web site constructed all their problems will go away. Indeed, this is when their problems begin to unveil themselves!

Now being prepared to take on all the pitfalls, traps, snags and snares possible when opening up your business is not all that easy. Quite difficult actually. Hence, the need for a very good business model or system. Without it your business will eventually start to decay, then rot and finally disappear from existence along with many others. You don’t have to worry, you will have lots of company from all the other businesses doing the same.

However, being “prepared” to open a business and have it succeed isn’t an impossibility. There are people who have the “knowledge” and “experience” necessary to guide you around almost all of the hazards of starting your business. I did say “almost” all the hazards! There is always the “unexpected” lurking around the corner. However, with good management of your internet business you can even overcome the unexpected, because your good business model or foundation takes care of everything, including taking into account good management. A good business manager will be able to find a way to solve even the unexpected.

You may have noticed I have been using the words model and foundation pretty much interchangeably. I should make it clear that a solid foundation has to be the center of any and all businesses! A business “model”. is a proven foundation for the business you are going to be engaging in. A business model would be something you could replicate for your business. Not all businesses have the same model, different businesses would need to have their own specific model, because of their genuine and unique properties. Obviously the business model for a trucking company would have to differ from that of a modeling agency. These are both vastly different businesses requiring their own unique business model.

Most of the basic parts of a solid foundation would hold true for all businesses, but a model would be best suited for only one type business. You would have a model for trucking companies, for example and you would have a different model for modeling agencies. Once you have a model for “your” type business all you have to do is copy its specific guidelines and your on your way to the operation of a very successful business. The model has already been tested and honed to be something you can emulate and almost be guaranteed of success. Keep in mind there are no 100% guarantees in any business, but your odds are immensely improved if you use a tried and tested model designed for your type business. You may be wondering where you might get the ultimate model for your use. Well, there are very experienced entrepreneurs out there who have been there, done that and are willing to let you know their secrets.

If you are considering the start up of an internet business its in your best interest to read my review. My current review is on a model for an internet home based business starting from the bottom and working it to the top, with special design consideration for the total newbie in mind. A “newbie” being one who is new to business or the internet or both, but also excellent source for the more advanced.