April 15, 2019
Steps for Developing a New Business Model
I used to teach a lot of leadership development programs in India and a couple in Myanmar to enable middle managers and aspiring individual contributors to excel in their positions and reach greater heights and that meant teaching them basic business management skills.
I had a lot of MBAs in my classes as well as ambitious high school graduates. Which ones would you think performed better by the end of our 16-week program? If you guessed the high school graduates, you’re correct. I noticed a few things in their backgrounds, many of the high schoolers had previous job experience, perhaps working at the mall selling telephones or maybe they were a tea boy to help out the family after school. The MBAs typically went to English high schools or even international schools, then went directly to college and then went directly for their MBA with no previous work experience. When I hire, I have always found that experience trumps education when hiring the right person for the job.
After the 16 week program, the class would split up into teams of four and had to produce a pitch, SWOT, financial projections, and an execution strategy. They then had to pitch our C-level employees who would invest in pitches that were coherent, realistic and broadened our set of services to clients to expand our market to new clients.
They had four weeks to create these documents and here is how we worked together to get it done. First, the mentor (me) would meet with the team together to discuss who would do each part of the presentation. It was never a simple voluntary choice – each would explain what skill sets they could bring to the table in order to complete their project. Once we came to the decision as to who would do what, we then documented the team deliverables and then we started on the next set of Advanced Leadership Development Topics.
Our Advanced LDP Programming included:
- New Business Idea Generation Techniques
- Conducting Feasibility Studies
- Techniques for Developing a SWOT Analysis
- Creating a Financial Forecast
- Launching a New Firm/Service
- Performing Profit and Loss Statements
- Hiring and Structuring Employee Organizational Charts
New Business Idea Generation
Many people in the East are loathe to put themselves out there and risk “loss of face” or feel embarrassed if their idea isn’t accepted. We started by looking at what ways we could expand our business and we used a Product/Market Expansion Grid to get started in generating new ideas. This took some effort and I would bring in Legos and other building toys, and a Nerf ball to throw back and forth to help with brainstorming. Anyone catching the ball had to say the first thing that popped into their heads. It was fun and made people relax and we just kept putting ideas on the board no matter how silly. The CEO, COO, CFO and I (the CSO) would always keep a list of business ideas on hand in order to assist the teams in generating a new ideas. If they couldn’t come up with something they could all agree on, they could select from the list of ideas we wanted to look into, but didn’t have the time. They could identify something not on the list to work on or use any of the ideas on the list, which was constantly updated as the C-Level team constantly shared what our competition was doing, what our partners were considering, etc. Once the team settled on an idea, the next step was feasibility research.
This required work from all four team members, splitting up to see whether the competition was doing something similar, what they were charging for it and who their customers were. We also researched internally. Did we have the people and processes in place to produce this product or service? Would we need external partners such as software developers to create the product or service? How much time would it take? How much would it cost to create and to maintain? How much would our clients be willing to pay for it? How many would be willing to use it? How easy would it be for a competitor to create a competing product? And most importantly, does this product or service solve a significant problem that customers were desperately looking to fix? This research could take months to accomplish, but they had very little time to do it. It meant talking to past clients now using our competitors’ services, existing clients, and other potential partners and surveying them with open questions to realize whether to move forward or not with their idea.
SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It’s a really basic tool that can assist in documenting further detail as to the feasibility of your idea.
- Strengths: How unique is your idea? How difficult would it be to copy the idea? How high is the profit margin from what clients are willing to pay? Does the idea lend itself as a viral talking point about your organization, potentially getting press and speaking engagements about it? Does it expand your market share or add new markets to your client mix? How hard would it be for a client to convert to another competitor once they started using the service? What do your clients see as your strengths? What factors would close the deal with your clients?
- Weaknesses: These are the exact opposite negative responses to the questions asked in Strengths. What needs to improve? What would cost you sales? What needs to be discussed is how to minimize these weaknesses. For example, let’s say you are building out a SaaS HRMS software. There are literally hundreds of them. Why sell the entire employee lifecycle of products when they can be sold as separate components such as Talent Acquisition, Onboarding, Appraisals, Payroll, Leave Management, Travel, Expense Reimbursement, Employee Exit, etc., at a much lower cost and get companies on board with one affordable solution and then upsell as their company grows. Having a solution that addresses each weakness will turn them into strengths.
- Opportunities: What is the market for your idea? Are there players in the market already providing this service? Would they be willing to partner with you in order for you to have a value add for your existing clients while they sell your services to theirs? Are there changes in technology that are directly affecting your market? How can you leverage this new technology? Are there new trends changing your industry? A useful approach when evaluating opportunities is to look at your strengths and see if any of these can be leveraged to maximize your idea’s potential and also look at your weaknesses and see if there are ways for you to improve in these areas in order to realize your idea and make it successful.
- Threats: What obstacles are you facing? Do your competitors already have this service or product? Are there regulatory or technology challenges that could significantly impact your idea? What threats do your weaknesses expose you to?
Creating a Financial Forecast
Creating financial forecasts aren’t magic, but for some people, they are incredibly difficult to know where to begin, let alone be able to present and defend those numbers. There are two parts to your expenses:
- CAPEX (Capital Expenses): These are generally one-time startup costs to get your idea from just an idea to a legitimate minimally viable product (MVP) or service. These could include office space and buildout, equipment purchases, logo development, web site and other sales and marketing startup costs.
- OPEX (Operating Expenses): These are your monthly overhead costs from the electricity bill, telephones, salaries, insurances, taxes, etc.
Revenue: During your feasibility study, the team will hopefully have talked with clients, potential clients and past clients to discuss their idea and have a fair idea of whether they would be interested and what they would be willing to pay. This part takes a bit of work, but presenting your financial forecast requires you to identify how you can make a significant profit off of your idea.
Some companies use a Cost-to-Company multiplier to assess whether or not to execute the idea. A company that is creating a 2xCTC is paying the bills and making payroll. It may have downturns or sales cycles which could significantly challenge the ability to pay the bills and make payroll. Ideally a 4xCTC is the minimum any company should strive for. It enables a company to weather the ups and downs of the market, evaluate and invest in new technology, and innovate and expand into new markets with new services and products.
When building out our Financial Forecasts, we created three options – a low end that sees minimal growth and starts at around 2xCTC, middle (4xCTC) and a high end (6+xCTC). To get to those numbers, the person who is responsible for documenting the forecast will have to work with the rest of the team to create the value, cut the costs, and maximize revenue wherever it can to get there. The person presenting the execution plan needs to be very involved because the cost to launch the project may significantly hamper the first six months’ income, but create a much higher CTC in the following months. Watch your CAPEX as well. You may find solutions to significantly decrease those expenditures to ensure you start to show a profit by the end of year one.
The Execution Plan
Launching a new product or service can be as simple as adding a new page to your web site and contacting your current clients and giving them a one month trial of your service. It could also require the significant expense of external software developers, PR agencies, advertising networks, and a press launch.
But the launch is only the beginning. You need people who are trained to sell the product or service, execute it, put processes in place, create an escalation matrix for any significant issues that could occur, and everything else required from documenting orders to payment collections. When working with this person on the team, they will be creating a calendar with milestones that match the Financial Forecast (thereby also creating sales goals). The entire team needs to work together to understand if the idea is worth moving forward with.
So What of It All Goes Wrong?
As your team moves through these four parts of the idea development, there may come a moment when the team realizes that their idea doesn’t work. It will cost too much to develop, the pricing that people are willing to pay is too low to make a decent profit margin… there are many, many reasons why some business ideas just won’t work. But it’s still good to know. Having done the exercise rather than jumping in with both feet and all your money, you will have significantly decreased your loss potential and learned a lot from the experience. Even starting down the path with a small seed investment and a year to work on it, is still well worth the time and effort. Doing a post mortem on what didn’t work and sharing this knowledge with other teams will enable them to avoid the same issues should they arise.