Category: Starting a Business

The strategist is one who is concerned about the future of his or her personal, family or organizational life, and spends time and thought considering the best possible direction upon which to set forth. Yes, this makes us all strategists.

Strategy is, simply, chosen direction. Smaller, perhaps, than the mission or purpose of an individual, group, or organization — strategy can nonetheless be considered the directions we choose in our quest toward mission fulfillment. To establish direction, a strategy must be articulated to others.

That is, in addition to establishing a course for the future, one must get others on board for the ride. Influential strategists Gary Hamel and C. K. Prahalad posit that strategic leaders must not stop at analysis and resolve, they must spend quality time engaging others in understanding the chosen strategy.

So as a planner of strategy, you too must spend considerable time communicating… expressing… teaching… articulating. You must find ways to lead, inspire and move others. How to do this? Let’s look to one of the greatest communicators in history, Abraham Lincoln.

Lincoln’s deep empathy for the people of America motivated him to agonize over finding just the right words to truly articulate his vision of the future. Gary Wills points out in Lincoln at Gettysburg: The Words that Remade America that in Lincoln’s three minute address during the dedication of the Gettysburg cemetery, he reestablished the meaning to which Americans attribute the Constitution.

Surely, you recognize the words, which began: “four score and seven years ago our fathers brought forth on this continent a new nation conceived in Liberty and dedicated to the proposition that all men are created equal.”

This brief introductory sentence encapsulates what we now remember as what the American Civil War was about – freedom and equality for all people. Gary Wills and other historians tell us, though, that until Lincoln spoke these words, these ideals were not what the war “was about.” Wills says that today the Civil War means, to most Americans, “what Lincoln wanted it to mean.”

The majority of Southerners fighting in the war were not slave owners. Rather, many believed that they were fighting for a “way of life.” Larger issues such as the dynamics of the Southern economy also contributed to the situation. At the 1864 gathering at Gettysburg, Lincoln knew that he needed to articulate what the nation was fighting for — and he did.

Lincoln’s facility for expression — his “way with words” – enabled him to frame the meaning of the war for the people of his day in a manner that would empower Americans to frame their quest for civil rights a century later, and to the present day.

Lincoln’s use of the Declaration’s phrase about all men being equal elevated the notion to a single, supreme proposition about which we must all agree. Wills says that “by accepting the Gettysburg Address, its concept of a single people dedicated to a proposition, we have been changed. Because of it, we live in a different America.”

Now from Lincoln back to you. Remember that you are surely the master strategist for something. Whether we are talking about your own life, that of your family, or that of an organization you help to lead, it is important to articulate a desired direction for the future. To talk about the future in the manner that Lincoln did, try the following:

1) Don’t just state facts and numbers. Speak in emotional terms in order to connect with other people. Talk about the meaning of the places and accomplishments toward which you travel. A great way to bring emotion and meaning into your words is through story telling. Lincoln was a master story teller, endearing him to those around him. For more on this, look for an article called Story Telling that Moves People containing an interview with Robert McKee, in the June 2003 issue of Harvard Business Review. You can download it from HBR.org, or write to me at markrho@mindspring.com and I’ll send you a synopsis.

2) Use metaphors and imagery to convey a larger meaning. Lincoln’s well known metaphor that “a house divided cannot stand’ served to perfectly state his strategic position on matters of cessation. As another, Lincoln’s use of the phrase “the mystic chords of memory,” invoked a rich and spiritual understanding of how the American people are connected to each other… people of the north and south… people of the past and the present. A metaphor always draws the reader or listener from a specific matter in the here and now to a more general and larger truth to be told. For more thoughts on the use of metaphor in strategy, see my blog post called Metaphors Be With You: The Strategist as Poet.

One of the common challenges in business planning is that one often has a better handle on predicting expenses than revenues. It doesn’t mean you’re 100% sure about what your costs are going to be, but for many folks, when they start looking at sales, it’s a crap shoot. As a result, many business plans tend to “make up” revenue numbers to show a profit, confident that they’ll somehow get there. Most business plans I read present revenue numbers that are more fiction than good prediction.

Break even analysis is one way around this dilemma. For that, all you need are two numbers: estimated annual fixed costs (that one’s often pretty straightforward), and something called unit contribution. Fixed costs reflect those expenses that you’ll incur regardless of sales levels. It normally includes things like salaries and benefits, space, technology costs, accounting/legal/marketing, and so on. Unit contribution, on the other hand, represents how much of each unit or dollar of sales you get to keep — after subtracting all variable costs required to produce that unit, typically accounted for as cost of goods sold.

The basic break even formula is fixed costs divided by unit contribution. The result is the number of units that need to be sold to cover all your fixed costs. If you sell fewer units, then you lose money; more, you make money. An alternative version of break even analysis divides fixed costs by unit contribution percentage, which leads to the dollars (rather than units) that need to be sold to achieve break even.

Once you have that break even number, you can evaluate whether it’s practical to at least reach that level of sales. Be hard nosed about that. Compare it other businesses that you’ve researched. In many cases, this might be enough to demonstrate that your plan is not workable, as least as you have thought about it so far. Or it might just provide you with enough confidence that hitting that number will be relatively easy.

Either way, unless it includes revenue projections that are rock solid, every business plan should include some kind of break even analysis. Don’t leave home without them!

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For more resources, see our Library topic Business Planning.

• Copyright © 2011 Rolfe Larson Associates – 15th Anniversary!
• Author Venture Forth! Endorsed by Paul Newman of Newman’s Own
• Read my weekly blogs on Social Enterprise and Business Planning

The historian Alfred Chandler of Harvard Business School wrote a seminal book published in 1977 on the history of strategic decision making at the highest levels of Corporate America , including DuPont, General Motors, Standard Oil and Sears Roebuck. The book was called The Visible Hand: The Managerial Revolution in American Business. In this work Chandler proclaimed a maxim for the ages that has been followed as doctrine by strategists and consultants alike ever since. The maxim:

“Structure follows Strategy.”

That is to say, all aspects of an organization’s structure, from the creation of divisions and departments to the designation of reporting relationships, should be made while keeping the organization’s strategic intent in mind.

Strategy, of course, lines up the arenas and markets in which a company will compete, proclaims a targeted customer base, and asserts the matters by which the company will seek to differentiate itself. Chandler described how the successful progress of mid-twentieth century General Motors can be attributed to the strategic foresight of Alfred P. Sloan, who laid out the famous divisions of GM: Chevrolet, Pontiac, Oldsmobile Buick, Cadillac – listed here in order of pricing segment and lined up with market segments — so that each division could seek to please an intended customer segment. This is structure following strategy. Chandler showed that the need to reorganize — or to “restructure” — is triggered by a strategic shift driven by new technologies or market changes.

The way that you organize your company or organization to optimize the pursuit of strategic objectives is an important part of organizational design. Other design elements, such as hiring and personnel development practices, communication and decision-making systems, reward, recognition and renewal systems, all must be aligned around the chosen structure, but first you must decide upon the optimal structure for attaining your strategic objectives.

When considering a change in organizational structure, keep in mind the following criteria for a good structure:

• Aligns the organization to best follow strategic direction
• Allows for clearly defined roles and responsibilities
• Clarifies who makes what decisions.
• Enables clear accountability.
• Minimizes handoffs that affect the customer experience. Minimizes the customer “runaround.”
• Minimizes handoffs that create confusion over who is responsible for what outcomes.
• Pulls together the people who most need to work closely with each other.
• Allows information to flow unrestricted to those who need it.
• Creates manageable spans of control.
• Is augmented by informal channels of cross boundary communication.

Generally, there are five ways to structure a company or corporation: Organize by Function, Product, Customer Segment, Business Process, or Matrix. Here are the pros and cons of each:

Functional Structure (e.g. Operations, HR, Finance, Marketing Departments):

Pro:

• People with a common profession work together so standards of performance are well understood
• People in a unit “talk the same language”
• Easy to maintain stability

Con:

• Conflicts arise between organizations/departments since priorities and objectives often conflict
• Decision making must be done at the top, where a cross-functional team sits together at the same table

Organizing around Product Lines or Programs

Pro:

• Strong identification with products
• High degree of coordination between functions
• Can allow rapid response to market changes affecting a class of product
• Employees can see big picture and relate to a common outcome
• Opportunity for employees to learn other functions
• Decisions can be made closest to those working on product, more bottom-up decision making

Con:

• Can be lack of coordination between product lines
• Functional or professional development can suffer as functional experts are isolated from each other
• Can be duplication of efforts across product groups. R&D can be parochial, only focused on present clustering of products

Organizing around Customers or Market Segments

Pro:

• Deeper understanding of customer needs.
• High coordination among functions aimed at meeting customer needs.
• More responsive to customers. Greater flexibility within business units for purpose of adapting to needs of a particular customer segment.
• Team members see the big picture.
• Innovation is customer-driven.
• Can be more satisfying for workers, as mission of customer focus is clear.
• Opportunity to learn new functional skills.

Con:

• Can be lack of coordination between business units.
• Functional or professional development can suffer as functional experts are isolated from each other.
• Can be duplication of efforts across product groups. Team members cannot relate to disparate customer segments.

Organizing as a Business Process (as championed by many experts on corporate “reengineering”)

Pro:

• Clarifies business outcomes at every stage of value delivery
• Organizes people in such a way that problems do not fall between the cracks or go unattended
• Enables people with a common language across the organization, making it easier to identify and reinforce accountability
• Facilitates cross-functional understanding of the business

Con:

• Can diminish focus on the customer unless customer-facing processes are truly prioritized
• Experts in functional areas such as Finance, HR, Marketing, etc. can be devalued and unheeded
• Can be duplication of efforts across process groups.

Organizing as a Matrix (e.g. customer segment groups crossed in matrix form by functional, supporting departments.

Pro:

• Simultaneous focus on external and internal business requirements. Can lead to more integrated, holistic decision-making.
• Employees can be reminded of the needs of the whole business enterprise.
• Functional expertise can be directly and immediately applied to needs of program, product or customer issues.

Con:

• Can lead to diffusion of accountability.
• Can be difficult to locate cause of organizational issues.
• Can mean doing more with less people, and result in individual frustrations.
• Can lead to confusion among customers who wish for a single point of contact.
• Requires a very high level of competent lateral communication capability

Microcredit offers great promise in helping the world’s poor. The basic idea is that a small loan, say $100, can help someone in the developing world buy some goats or a sewing machine, and use that asset to earn a living, plus pay back the loan. The idea has proven so successful in Bangladesh and other countries that one of the pioneers of microfinance, Muhammad Yunus of Bangladesh, of the Grameen Bank, earned the Nobel Peace Prize in 2006 for developing this idea.

Incidentally, microfinance refers to a wide range of beneficial financial services provided to the poor; microcredit specifically relates to providing very small loans, which are called microloans. And while we’re in the “micro” area, microenterprise refers to very small business organizations, typically 1-5 employees.

Microfinance has also been used to some extent in the developing world as well, including the United States, but with some additional twists to fit different circumstances. A good resource on this work comes from the Aspen Institute’s Field Program. One place where you can participate yourself is through Kiva.

The recent problem with finance concerns its role in India, where it is a big player in the rural areas. The problem is that the cost of developing and servicing these loans can be high. As any banker will tell you, it’s a whole lot more efficient to service big loans than small loans. And tiny ones are the most expensive. And so that’s why in India interest rates for microloans can be as high as 30%, which can put a big burden on the borrower. And, if the microfinance company finds ways to improve efficiencies and increase collection rates, it can also be very profitable.

In any event, in India there has been quite a revolt against those high interest rates, putting the entire sector on notice that it must reform its ways or face extinction from government regulators, and organized campaigns not to pay back loans with unreasonably high interest rates.

For more information, here are some recent articles on this revolt, from National Public Radio, and from the New York Times. And here’s an op-ed piece yesterday in the New York Times about this crisis, from Muhammad Yunus, entitled Sacrificing Microcredit for Macroprofits.

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For more resources, see our Library topic Business Planning.

Copyright © 2011 Rolfe Larson Associates – Fifteenth Anniversary, 1995 – 2010 —– Author of Venture Forth! Endorsed by the late Paul Newman of Newman’s Own ———- Read my weekly blogs on Social Enterprise and Business Planning

In the old days, people raised money for their start up ventures in traditional ways. They put in their own money and sweat equity. They borrowed against home equity, insurance policies, and credit cards. If they were lucky, they also got money from friends, family, even “angel” investors. They collected gifts, loans, forgivable loans (“pay me back if you can”), or even equity in an informal sense. Sometimes banks helped out, but usually only with personal property or personal assets as collateral. A very few received support from venture capitalists.

Flash forward to today, and while all of those sources are still commonly used, new possibilities have opened up. New funding strategies have emerged via the Internet such as crowdsourcing or crowd funding.

The basic idea is that instead of just asking your friends and family to seed your business, you ask The World. No longer are you limited to whom you know, or defined by the whims of conventional financing sources. Moreover, by getting the word out online, you can start that all-important word-of-mouth marketing campaign before you open your doors.

While hardly widespread, this approach is emerging as an option for some entrepreneurs.

Two noteworthy examples are Kiva, which allows people to make loans to small businesses in the US and abroad, and Indiegogo, which has raised millions of dollars in 150 countries for worthy causes. Awaken Café is a start up business launched with this kind of help.

But do your research before going too far with this. While asking for donations is generally fine, soliciting investments from the general public without proper registration with the appropriate regulatory authorities can get you into deep, deep legal trouble. I’m not a lawyer, but I’ve been told that virtually any solicitation that includes offering a share of the profits is considered a regulated security. Beware!

Here are some places to get more information about crowd sourcing and crowd funding: SocialEdge, Wikipedia, YouTube, or Indiegogo. Good luck!

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For more resources, see our Library topic Business Planning.