Although planning is integral to the success of an entrepreneurial venture, it has to be the right kind of planning. If a company gets it wrong, the result can be a spectacular flop.
#b#Rita McGrath#/b#, associate professor at Columbia Business School, maintains a “flop file” of business ventures that ended in a mammoth freefall. One was the online grocer Webvan, which lost about $1.5 billion because “people didn’t hate grocery shopping as much as they said.” Others were Time’s “TV-Cable Week,” an attempt to upend “TV Guide,” and Motorola’s Iridium, an early venture into satellite phones.
What often happens in the case of these fabulous flops is that, despite careful planning in the beginning, the companies lost sight of changes occurring in the environment outside. Take Iridium. It seemed like a brilliant concept in the mid-1980s — a way to communicate globally using a network of low-earth-orbit satellites. But by the time the technology got to market, in 1998, the world had changed, and the answer to the question “Would you like to pay about $3,000 initially and then $7 a minute for a global phone that requires user dexterity?” was a decided no.
What had earlier seemed like a workable product offered far less value by the time the phone came to market in 1998. The world had changed, with roaming agreements in place; mobile phones that were significantly smaller, had longer battery lives, and could connect to phones from different companies. But Iridium’s plan had not changed in response.
“They had planned in a detailed, comprehensive way, but didn’t take into account that the world was changing,” McGrath says. “They planned as though the information in the original plan was going to stay the same.”
McGrath will present “Grow Your Company Safely in Uncertain Times,” on Thursday, October 7, at the Princeton Chamber lunch beginning at 11:30 a.m. at the Princeton Marriott Hotel. Cost: $60. For more information, call 609-924-1776.
For entrepreneurs who want to start new businesses and existing companies that want to get into new business ventures, McGrath recommends a process called discovery-driven planning that incorporates changes in the environment into the planning process. She describes each step in the process:
#b#Specify what a good outcome would be#/b#. At this stage a company is deciding what success would look like. Financially this might mean how big and how profitable the company would need to be to generate sufficient income for the entrepreneur.
Although anyone considering a new business would make these kinds of projections, what is different about discovery-driven planning is that, having made these assumptions, the entrepreneur works backward from them.
McGrath has an example. A former reporter from the Sacramento Bee newspaper in California wanted to open a shop selling imaginative toys. The 3,100-square-foot store would sell novel — but not electronic — toys and games. He consulted with McGrath in 2006 about his prospects for success.
Starting with his assumption that he would like the business to earn $250,000 a year, then, assuming a 50 percent markup, he would need to generate $500,000 of gross revenue. The next backward step was to determine how many toys he would have to sell to generate that kind of revenue. Given that the bulk of toy sales occur during the eight weeks before Christmas, he realized that he would need to process 1,250 purchases during each of those weeks.
At this point he proceeds to the next step, where he will do the research necessary to determine whether he will be able to sell toys in these numbers. If not, he will have to rework his assumptions.
#b#Use benchmarking to impose the discipline of the market#/b#. Through benchmarking a company can decide whether its aspirations make sense within the realities of the marketplace. McGrath once worked with a chemical company considering the launch of a new initiative. She used this venture as a teaching case for one of her courses. The company, which made branded fibers, planned to integrate into private label apparel to sell in department stores.
To benchmark, McGrath sent her business students to the library to research market sizes and make market share estimates. What they found was that to hit the plan numbers for year five, the new company would have to sell one out of every six garments sold at every department store in the United States.
Since the company as yet had no experience in the garment industry, it had to decide whether this was realistic. “They needed to realize that this was very ambitious, and they would have to have a really good answer about how they were going to overcome the obstacles that getting into that business would present,” says McGrath.
To proceed with its plans, the company would have to show how it was going to depart from industry norms, for example, by way of a different distribution or manufacturing approach that would yield a major cost advantage.
Decide what operationally must be true for the business to be successful. One company that McGrath worked with was exploring a move from selling products to procurement departments to developing high-end solutions to sell to executives. Its ambition was to start generating revenue from this new endeavor within two years.
McGrath started by asking how many salespeople the company had and where they were located. When the company responded that it had not begun recruiting salespeople, she had them figure what operational realities must be overcome to reach their goal. They realized that it would take six months to find and recruit salespeople with senior-level selling ability and another six months to train them — and then they would be dealing with a sales cycle of six months to a year.
#b#Create an assumptional checklist#/b#. At this point, the company takes its high ideas and converts them into detailed, written assumptions that reside in a spreadsheet — for example, number of salespeople, investment required, and production details.
“To produce the checklist, you will make a bunch of assumptions, which the technique requires you to write down,” says McGrath. This list allows the business to modify its assumptions over time by incorporating changes in the business environment. “Your assumptions start getting better as you become more aware of the facts of the case,” she says.
#b#Do checkpoint planning#/b#. Any business trying to grow goes through characteristic moments, or checkpoints, at which it is going to learn a lot. These events might include the first prototype, the first market survey, or a conversation with a potential distributor. “When you hit one of these checkpoints, you have a checkpoint review,” says McGrath. “You go through your plan and say, ‘Which of these assumptions appear to be borne out and which should we be changing?’”
It is this piece that is missing from the big business flops — the discipline of going back and checking. To make sure this happens, the business should appoint someone as keeper of the assumptions, says McGrath. This person has the responsibility to go back and look at the assumptions as the plan is unfolding.
By including all assumptions in one spreadsheet, discovery-driven planning also gives senior executives one consistent way of looking at where the business stands. “There is a consistent format that shows explicitly what the assumptions are and where they came from,” she says.
McGrath offers the example of a bank that wanted to get into the asset securitization business. The bank had initially thought that its target customers would be very sophisticated companies that wanted to use securitization as one more methodology among its financing vehicles. But through checkpoint planning, it learned something very different.
“What it found out was that its best customers were people short on cash, who weren’t very sophisticated,” says McGrath. “Because they were desperate for the cash that securitization of receivables could produce, they were willing to pay much higher prices than the company had thought it could get.”
McGrath’s parents are scientists, her father an organic chemist and her mother a microbiologist, who immigrated to the United States from Germany.
Her father first worked at Yale Medical School, then moved to Rochester, where he worked for Xerox and then Kodak. He ended up at a pharmaceutical company in Pennsylvania, where he has been ever since.
McGrath graduated from Barnard College in 1981 with a degree in political science, then earned a master’s in public administration from the Columbia. After graduate school she became an entrepreneur. She and a partner first started a political consulting business, Lawri Associates, in the early 1980s, during the early days of personal computers and desktops. They also did some typing and word processing on the side.
Because in New York City whoever won the Democratic primary won the election, primary voter lists were very important for targeting political advertising and other materials. Although these lists were public information, they were not readily available in a digital format. So McGrath and her partner took their Kaypro computers to the elections office, went through the election rolls, and created digital voter lists.
“We did pretty well the first year,” she says, “and then we made the kind of mistake that you make when you are young and idealistic — we forgot that elections don’t happen every year.”
The political consulting business evolved into a 24-hour typing and word-processing business near campuses, Unworried Words. Although the business did pretty well, McGrath eventually left. “I had a dark night of the soul on one weekend and asked myself, ‘Is this what you want to be doing?’” She decided that public policy was her real interest and she sold out to her partner in 1983.
Her next job was with the City of New York, where she eventually became project manager of computer-related design for the city’s online procurement system.After eight years in this job, McGrath decided to go back to school for a doctorate from the Wharton School. Her primary interest was corporate venturing — how to create new business from within a firm. After finishing her degree in 1993, McGrath joined the faculty of Columbia, where she teaches MBA and executive MBA courses and is director for the Columbia executive education program
With the help of the discovery-planning process, new businesses and business ventures continually incorporate environmental changes into their basic business assumptions. Although the process does not guarantee that every venture will be a success, reconsidering assumptions at regular checkpoints should avoid the spectacular flops that occur when companies fail to adjust to changing business realities. —
