Like our readers, we keep our eyes open for business insight on the web. We came across John Warrillow, a writer for the Globe and Mail. He comes with the credentials of a newspaper writer – published author, successful businessman. It’s quite shocking to read his blog. Each post contains a statement that is either obvious or ridiculous. Here is a short sampling of his work.

Golden nugget #1: If you are looking for entrepreneurs, screen out MBAs. Here he states that the best way to hire entrepreneurs is to eliminate MBAs from your hiring pool. He sites a study that concluded that MBAs don’t think like entrepreneurs. That somehow, all of the different programs offered throughout the world produce a bland, unimaginative robot that can only think linearly. If the MBA didn’t see a similar case study in class, he will be helpless. This is like me saying that all dentists make for bad golf buddies or all teachers can’t do their taxes. It’s just crap.

Golden nugget #2: Winners look within for success. Losers look outward for excuses for failure. Well, duh. My high school football coach summed it up in one sentence in 1985 – “Excuses are for losers.” (Thanks Mr. Sekulich!)

Golden nugget #3: Smart people hate it when you ask stupid questions. Here’s another obvious statement. When you have an excellent team, you can’t lead them by always asking leading questions. Even the dullest genius will see that form of treatment as clumsy passive-aggressiveness.

Golden nugget #4: Business plans are a waste of time. Warrillow, in a fine demonstration of tortured logic, describes how he wrote a business plan for a product that nobody wanted and blamed its failure on the time wasted writing the plan. He didn’t test the veracity of his assumptions and found out too late that he didn’t have a viable business plan. He then makes the tremendous leap to say that business planning is a waste of time.

Is John Warrillow our version of....

...this fair and balanced pundit?

Is the Globe using Warrillow’s column to stir up interest like Fox used Glenn Beck’s paranoid rants to stake out new ground on the American political right? It’s either this or they aren’t reading his columns too closely. If their intent is to generate web traffic, it’s probably working. I like reading columns that challenge the status quo, but if you replace conventional wisdom with stupid rules of thumb, have you really added anything to the debate?
Whenever I read something like these blogs, my faith in common sense and logic takes a hit. Thankfully, the comments section is there to restore this faith. An exceptional comment came from the inc.com posting of the business plan blog. Rj, whoever you are, you’re my hero:

“I had no basis for this assumption. I just made it up—which, of course, is the problem with the business plan of most start-ups…”

When Science is a Waste of Time
I believed I could turn water in solid gold by combining it with dirt and cinnamon. I had no basis for this assumption, but I did some experiments and it turned out that it didn’t work. And that’s why scientific experimentation is pointless.
Posted by Rj – 04/14/2011 02:25 pm.

I don’t know how many times I’ve heard entrepreneurs say this or how many times I’ve read it in a business plan. It seems simple, right? How could the business not get such a small percentage of the market? And given that the market it huge, they’ll be doing 8 figures by their third year. Unfortunately, this weak reasoning often lulls entrepreneurs into a false sense of security. No one gives you market share for just showing up.

The market you are entering is huge. That’s great. It means that should you become successful and be able to gain market share, the rewards will be big but it’s nothing to base your financial projections on. If you load up on debt based on these mistaken projections, you will learn the impact of negative cash flow in a hurry.

I remember a restaurant that based their projections on an assumption that they could get a certain level of gross revenue. The problem was that when I took into account the seating capacity of the restaurant, the hours it was open, and the expected table turn over rate the average spend per customer would have to be $100 to achieve their revenue projection. I don’t know about you, but I frequently spend less that $100 when going to a casual dining restaurant. Clearly their gross revenue assumption was unreasonable. The restaurant in question closed down after 4 months of operation. The owners weren’t willing or able to fund the monthly losses.

A much better way to have done the revenue projection would have been to work it from the bottom up. If they would have made an estimate of the average number of customers through their establishment in a day and the average amount each customer would have spent, they could then have calculated the gross revenue for the business based on these numbers. After deducting the direct cost of goods sold (such as food) and the overhead costs (like rent) they could have determined whether or not this combination of the number of customers and the average spend per customer would have given them the financial return they wanted. If not, they could change either variable to see what it would take to break even.

This method of calculating financial projections has an advantage in that it is easier to determine if the revenue number is reasonable. Going back to my example, the prospective restauranteurs would have been able to tell very easily that their gross revenue number was not reasonable because it was not likely that the average customer would spend that much money per visit. They would have then known to rework their cost structure so that the restaurant could have turned a profit at a more reasonable level of customer spending. On the other hand, they may have decided to give up on the project, which would have been a better decision that would have saved their investment capital. There is a lot of value in learning that you shouldn’t make an investment.

It’s a good idea to research the size of the potential market for your product. It lets you know what a major success could look like. It also lets investors know the size of their opportunity. What it doesn’t do is let you know how much market share you’ll get. Work from your business’s fundamentals and build up. While it won’t give you a perfect prediction of the future, it will allow you to make a better judgement of what is or isn’t reasonable.

Carrying on from last week’s blog “Finding Your Competitive Advantage,” this week we look at how WestJet found success by finding its niche in the airline industry.

WestJet is a unique case because it was able to position itself as a company that offered both lower prices and better service than its competitors. That’s something many businesses would like to accomplish but easier said than done. Back in 1996, West Jet took a look at its main competition, namely Air Canada, and found a segment in its market that wasn’t being served adequately by the airline industry. This reflects the importance of knowing your target market and understanding customer “pain” points. West Jet identified this segment as families that travelled with children by a vehicle. This segment was not prepared to pay more than $200 an individual to reduce travelling time. But given an option of flying for less than $100, WestJet realized that these travelers would choose to fly at these prices to reduce the “pain” of driving long distances. But it wasn’t as simple as saying that reducing prices would translate into business success. WestJet’s financial analysis indicated that they would be able to generate a profit at these prices but only if costs were controlled and the company would have to start small. In order to control costs, the company decided to invest in one type of aircraft to serve main cities in Canada instead of investing in different models of aircrafts needed to reach all cities and communities. Although this reduced the size of their target market, it reduced WestJet’s costs and, as a result, they were able to offer lower prices than their competitors. WestJet also decided to formulate a superior customer service plan. They had noticed that the competition did not have great customer service and this was an area that could be improved on. So, in short, that was the company’s plan. Reduce rates and increase customer satisfaction.

At that time WestJet didn’t know whether their business plan would translate into success. We all know WestJet succeeded in its venture but it doesn’t seem like they did anything special. They lowered prices and increased customer service. Sounds simple, right? But back in 1996 they were the only company to realize that the “family segment” was an unserved market in the airline industry. They realized an unmet need and developed a model to serve this need.  They studied their competition and realized that there was room for customer service improvement. They found a niche position in the airline industry and developed a model that would allow sufficient margin for profits. There was a lot of planning involved before the venture began and, as a result, WestJet uncovered a great opportunity. So before you go out and declare lower prices and promise to increase customer satisfaction, remember, take the time to research and understand your target market and competition. It will help you decide how to position yourself in the marketplace and develop the right business model. Good luck in finding your edge!

When starting a business, a common problem is a lack of cash. In fact, many of our clients believe simply having enough funding would solve their problems. While it can be partially true, this kind of thinking can be disastrous for a startup. Here’s why.
What lenders and investors look for
When assessing lending or investment opportunities, different groups have different decision criteria. They all, however, require a strong chance at recovering their investment. For this, each opportunity must satisfy for the lender or investor:

• There is a compelling market opportunity.
• The entrepreneur has a plan in place to exploit the opportunity.
• The plan is realistic and thoroughly vetted.
• The management team is the right one for the business. It has the skills, drive and experience to make the business successful.

Even if the rest of the application is great, any one of those requirements can kill funding. Notice that nowhere in these requirements is a mention of the entrepreneur’s need to buy groceries or pay rent. If you appeal to anybody except family, friends or fools based on economic need, you will come up empty. If that’s not bad enough, it gets worse.

If funding applications were a matter of filling out some forms and getting an answer in the mail, it wouldn’t be too bad to apply for funding before you are ready. The reality is funding applications are completed by people and these people make judgments and talk to each other. Think of applying for funding as offering to bake a cake with the lender’s flour, eggs, sugar and flavouring. Nobody is going to want to pay for a bunch of ingredients mixed together that doesn’t resemble a cake. Plus, all it takes is one bad application for your reputation as a bad investment (chef) to be made.

If this was the cake you paid for, you'd fire your chef. But by prematurly applying for funding, you are trying to pass off eggs and flour as cake.

Another bad outcome of premature fundraising is it is extremely difficult to hide your desperation. If you do get funding, the terms will be bad enough that you will regret agreeing to them.

Applying for funding too early can be like dealing with this guy.

So what should you do? The friends, family and fools route can give you a bit of breathing room while you develop your business. Find alternative financing through odd jobs, savings and equity. In addition, do more with less. Think of how to develop the business without funding. The more progress you can make before you seek funding, the more valuable your business will be.
Finally, before you apply for funding, pitch your proposal to trusted friends or associates. This includes sharing your business plan with them. This outside perspective can alert you to blind spots that every entrepreneur is susceptible to. You need somebody that will give you straight answers, not just praise. This should allow you to put your best foot forward in your search for funding.

Before investing in a business, one of the most important things to identify is your competitive advantage. Answer the question “why would customers choose your product/service over competitor offerings?” What makes you stand out from the competition? I’ve found that not enough thought goes into what a company’s real competitive advantage is and many companies are actually operating without one.

Think about your business. What is your competitive advantage? To determine the answer you first need to identify your target market, your competition and yourself.  The following provides a list of questions to help get you started.

Target Market: Its important to understand your market and how you plan to approach customers. Ask yourself the following.

• What market segment are you targeting and why?
• Who are your customers and why would they choose your product/service?
• What are your customer demographics?
• Where are your customers located?
• What are your customer purchasing habits and buying trends?
• What customer needs are being fulfilled by your business? What are your customer needs?
• How often do customers purchase your product/service (daily, weekly, monthly, etc.)?
• What marketing tools will you need to advertise to these customers?

Competition: Understanding your competition is key. Learn from their mistakes, what they do well and how you can differentiate yourself from them. List companies trying to do the same things as you and identify the following about your competitors.

• What is their business model?
• Who are their customers?
• What are their strengths and weaknesses?
• How strong is their brand?
• How well are they performing? (profit margins, revenues, expenses, etc.)
• Would you purchase their product/service? Why or why not?
• What is their competitive advantage?
• What competitor would you model yourself after and why?

Yourself: You need to understand your own business offerings and the things that make your company unique. Answer the following.

• What are your strengths and weaknesses?
• What is your business model?
• What are your company goals and objectives?
• What product/service are you offering and why?
• What makes your product/service different?
• Why do you think you can compete successfully?

These questions will help you determine your competitive advantage or whether you need to rethink your business model. Often, you realize that the things you thought were unique to your company are not really unique. The most common things we hear are “my company offers the best service, our prices are the lowest, or our quality is superior.” But how can every company truly claim this? A lot of businesses think they have a competitive advantage but can’t support it after some research. Take a closer look at your business and answer the questions above. You might just be competing head-to-head with your competition without a real strategy.

Next week we’ll take a look at how West Jet established a competitive advantage in the airline industry.

If you’re thinking of starting your own business, you might be doing some research online. Whether it’s in blogs like this one, forums or question and answer sites, they will all tell you to write a business plan. Unfortunately, that doesn’t do you much good if you don’t know what a business plan is. The definition of the term “business plan” might vary depending on who you ask. What I’ll try to do in this post is define the term business plan as we see it.

The Government of Canada’s Business Services For Entrepreneurs website defines it as:

“A business plan is a written document that describes your business, its objectives and strategies, the market you are targeting and the financial forecast for your business. It will assist in setting realistic and timely goals, help secure external funding, help measure your success, clarify operational requirements and establish reasonable financial forecasts. Preparing your plan will help you focus on how your new business will need to operate to give it the best chance for success.”

I’ve included their definition because I think is most accurately describes what a business plan is. However, I think it is important to acknowledge what the definition does not include.

Every business starts with an entrepreneur’s idea. Sometimes the idea breaks new ground and sometimes the idea is one that has been successfully done many times before. In order for an idea to become a business, the entrepreneur has to come up with a business model. An entrepreneur with a mainstream idea can copy the model of other successful businesses that are based on the same idea. With ground breaking ideas, this can be difficult because there may not be any appropriate models to copy. The entrepreneur will have to come up with the business model from scratch. The model will then have to be tested by conducting research and analysis through a feasibility study.

A business plan is not for idea generation, business model development, or studying feasibility. These steps should all be completed before the business plan is started. The business plan may have an impact on this previous work but its main goal is to describe how the business model will be implemented.

Some entrepreneurs come up with their idea and want to dive straight into the business plan before developing a business model or testing its feasibility. This can make for a document that is an incoherent mess because it is trying to be too many things. Presenting a document like this to bankers or investors can create problems because it makes the entrepreneur look unfocused and unsure.

A business plan should be written by the entrepreneur; either alone or with professional assistance. The plan belongs to the entrepreneur and should be used to guide implementation of the business. It should not be written for a banker or investor.

I like the quote: “No plan survives first contact with the enemy,” by Helmuth von Moltke (the Elder), a 19th century General Field Marshal in the German Army. This can be adapted to say, “No business plan survives first contact with the customer”. A business plan is not meant to be completed and put on a shelf. It is meant to be a living document that is revisited and adapted as conditions change. Many entrepreneurs make the mistake of not incorporating a feedback loop in the business planning process.

I hope this has clarified the concept of a business plan. I’ll look to elaborate on the entire journey from idea to business plan in future posts.

So what’s the deal with business plans? Do they serve a real purpose or is it simply a document people need to fulfill loan requirements. The reason I’m asking is that it’s a question that’s often asked or implied when the topic of business plans comes up. Is a business plan really useful?

Well, for starters, a good business plan should serve as a blueprint for every aspect of your business. It should guide you with your business and help you establish targets, goals and objectives that otherwise might not be thought out carefully. Business plans reduce the time spent making decisions. How many employees do you need on certain days? Who is responsible for equipment maintenance? How much cash-flow do you need on hand to keep the business running? What margins are required for you to make money? These are the types of things that you need to be prepared for so you can knowledgably make decisions for your business. Business plans should help improve communication between all members of the business by creating a sense of common purpose for the people involved. It should get everyone thinking about strategy, thinking outside the box and thinking inside the box. Basically, it’s to get everyone thinking about all key components of the business.

A business plan should involve both the business owner and the party responsible for developing the business plan. I don’t think people realize how important the process of developing a business plan is. The best business plans are developed with the full involvement of the business owner.  A good developer poses questions and guides the business owner to make decisions on their own. We’ve had clients thank us for posing questions that led them to build solutions through brainstorming and team exercises.  Clients have mentioned that the process of building the business plan is as important as the final document itself. Think of what’s involved in building a house. Overall, most people know what a house looks like and what its built of. But you wouldn’t go out and build a house without the aid of an architect and blueprints. So why would you invest hundreds of thousands of dollars in a business without first putting the time and effort into a business plan?

At the end of the day, a business plan won’t be the reason for your success or failure. It cannot guarantee success and its not going to increase your bottom line. Its meant to help you make decisions, be prepared for barriers and risks involved, and to get you thinking strategically about the details of your business. A good business plan will show investors that you’ve spent the time and effort in developing something you believe in. Its something that you can look back to and use during the lifetime of your business. A good business plan is something you will update and change over time so it will always remain useful for your business. A business plan is the first investment in your business, and it should be a good one.