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Business Planning: Avoiding A Classic Trap

By Jack Osborne

 

Your company is either in start-up or developing mode.  Perhaps it is even established (and profitable).  Executive management, or the Board, has mandated a strategic expansion of the business.  An in-depth Business Plan has been completed, including supporting financial pro-formas. A key assumption is that the new business initiative will capture market share, and increase operating margin.  It all sounds wonderful, and it could happen.  But . . .

 

This is one of the classic mistakes of planning for new business.  As much as experienced managers wish, or plan, that increased market share will result in higher profitability, often the two are disjointed, unrelated, or even contradictory over the near term (possibly years).  Eventually it may happen, but even then, a compelling dependent relationship between the two may be difficult to ascertain.

 

The reality is, capturing market share is not simple or easy, and doesn’t happen without significant costs, not always visible, and not always planned.  Competitors are real, determined, smart, and just as interested in keeping their share as you are in taking it. Even if your company enjoys a remarkable cachet in the market, (e.g. Apple), it still is affected by dynamic market forces - some you can control, some you can’t.  

 

Aggressively pursuing market share, even through new technology, involves pricing actions (reductions), other “push” and “pull” related costs, and even distribution costs. These actions have an effect on all products in your suite, including newly announced products.  Plus, there are cost implications from the manufacturing side – rarely does a ramp-up, or new product introduction, occur without additional real manufacturing costs.  All of these factors act to squeeze both gross, and operating margins over the near term, whether or not they were part of the plan.

 

The most realistic new Business Plan must always identify the main objective.  Management must decide – does it want to capture market share, or increase operating margin?  It must not expect to accomplish both within the same plan, and certainly not within the same time frame.  This strategic decision, of selecting one or the other as primary objectives, often involves also selecting different tactics and implementations.  Usually one objective comes at the expense of the other, not as a complement to the other.

 

The smartest, and most successful, approach in business – any business – is to understand exactly what you aim to do, and then create plans that carefully and conservatively are crafted to accomplish those identified objectives.  Only then does your company have the best opportunity to achieve its plan(s).  

 

        

 

 

 


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