Optimising business planning.

Hi, I’m Bron Lawson from Westpac’s Davidson Institute, here to talk to you about ‘Optimising business planning’. A business plan is a great tool to help give business owners clarity about what they’re looking to achieve in their business and how they are going to go about it. However too many business plans end up gathering dust in the bottom draw rather than being the active, dynamic business tool they can be.

In this video, I’m going to show you some analytical tools that are relevant, no matter what industry or business you are in, to help optimise your business planning. Regular reviews of your business plan using these tools prompts you as the business owner to ask questions, identify issues, look at options and importantly measure performance, helping you get the most out of your business.

In optimising business planning we are going to have a look at: • Some of the key strategic considerations that should be addressed and reviewed in your business plan. • Some of the tools we can use to get a better understanding of the market we operate in. • And then take a deeper look internally.

Throughout the process you may find there is nothing to change, but the most important thing is that regular reviews encourage you to ask questions, identify issues that may be affecting performance, and ensure your business plan is still aligned to what you are trying to achieve.

Let’s begin with strategic considerations. For a business to be viable and sustainable in the long term it needs to sell something that people want to buy and that it can make a profit from. So, at the very core of developing a business strategy is identifying who those people are that will buy your product and get to know them very well.

Questions you could ask yourself, “What do they look like? How old are they? How much money do they earn? What do they spend that money on? What do they really care about? What makes them happy? What frustrates them? What need or want does our product satisfy? And what motivates them to buy from us?”

One way you can start to get to know your customers is by looking at their demographics. Things such as age, gender, marital status, education level etc. The ones on the screen are just an example and there may be others that are relevant to your business/industry.

Also, bear in mind how to collect the information that’s relevant to you. Large corporates spend a significant amount on customer focus groups and research companies to obtain this information however you could simply talk to your customers as they do business with you, ask them to fill out a survey or something similar.

When you understand what’s happening in the customer’s world and can see things through their eyes you can potentially make a real connection that enhances their willingness to shop with you.

Once you know your customer well you may then consider moving on to the next strategic consideration for your business which is … your brand promise. What is it that you want your business to be to your customers? What does your brand promise to the market?

Do you promise to fix their problem and put a smile back on their face? Do you promise that they’ll get great service every time? Do you promise to give them the cheapest price? What you promise and deliver consistently becomes your brand and a business’s brand is a recognisable entity that customers can relate to.

A brand creates an emotional and practical response in your customers and potential customers that can act as a shortcut for when they are making a purchasing decision. It enables the customer to associate that brand with things such as happiness, satisfaction, or comfort, and builds trust that means they don’t have to reassess the product or business every time they make a purchase.

Your brand should be conveyed in every single interaction you have with the market, existing customers, and potential customers to consistently reiterate why they should be buying from you.

Think of some well-known brands … brands like Qantas, MacDonald’s, Holden, NRL, Woolworths … then think about how you feel about those brands. What sort of emotions do they elicit from you? What do you associate with each of these brands? Then ask yourself, “How do my customers feel about my brand? Does their perception match my vision? Am I living up to my brand promise?”

Our next strategic consideration is the environment we operate in. Firstly, we’re going to look at the external environment and what is going on around us. This can include such things as what our competitors are doing, what's happening in the industry and how customer tastes are changing. We will look at this in more detail in our ‘Market analysis’ section shortly.

The final strategic consideration is your internal environment. This is about your own operations and what's happening within the business; your ability to meet customer expectations; and fulfil on your brand promise. And again, we’ll deep dive into that later in the video in our ‘Business analysis’ section.

Your business does not operate in isolation. Your market is a dynamic environment that changes almost constantly and has competitiveness at its very heart. A useful 2 step process for analysing your business in terms of the market is firstly to understand what your niche is in the market and what you need to do to keep it.

To do this we’ll use Porter’s 5 Forces Analysis to examine the industry and its key players. Then, to identify and interpret events and trends in the market, we’ll look at a tool known as PEST analysis.

Firstly, let’s look at identifying your niche in the market and how that is affected by 5 market forces. Developed by renowned management author Michael Porter, Five Forces analysis is designed to give businesses a clearer understanding of the industry and how they interact with others in the industry.

The aim of the analysis is to look at the forces that shape an industry and could either harm a business’s profit potential or protect or extend a competitive advantage. It also helps to predict changes to the industry’s structure.

So, what are these five forces? Firstly, supplier power. Supplier power looks at things like … How many suppliers are there to the industry and how many does your business have? How big are these suppliers? And most importantly, who has the balance of power? If you only have a couple of big suppliers, you may be in a position where you have to accept their prices and terms rather than having the power of choice.

The next consideration is buyer power. This refers to when the buyer, as in your customer, is in the position of power, perhaps due to there being several alternate suppliers they can choose from. Information is power and now more than ever there are so many sources of this information. The emergence of the internet has seen a huge number of customers using this as an information source to find products at the lowest price possible from the most convenient source possible.

For example, the deregulation of energy providers, and influx of new players, has seen a massive swing in power to the consumer in that industry.

The next force to consider is threats of substitutes. This is about what else your customer could do or buy to fulfil their need or want. For example, when buying chocolates, the underlying need might be a gift for someone in which case an alternative, or substitute, might be flowers. This means that florists, not just other sweets vendors, need to be considered as competition too.

Also, we live in an age of dynamic innovation and disruption so keep in mind that the substitute may not even exist yet but is potentially not too far away and may not be what you’re expecting. An example that comes to mind here is that despite being the first to develop a digital camera, Kodak, to their detriment, didn’t predict the huge uptake of digital cameras by consumers that meant their products - film, photographic paper etc – were no longer needed.

The next force to consider is barriers to entry. This is about how difficult it is for new competitors to join your industry. Are there any restrictions that make entry into the industry more difficult or less attractive? Take coffee shops for example. In comparison to some other businesses, it’s relatively easy to get set up with a coffee machine, a ‘hole in the wall’, and a barista's certificate. This is an industry that has few barriers to entry so your competition can change rapidly.

Finally, barriers to exit are about how difficult it is to get out of the industry. At some point you’ll be looking to get out of your business. Whether that’s by closing down all or part of the business, or even selling it, what are the things that are going to make this more difficult? Are there any contracts or leases that need to be paid out? Are there conditions on the site of your premises if it was to be used for another purpose?

For instance, there are environmental guidelines in place to redevelop a site such as a petrol station that can add significant costs to an exit.

Looking at these five forces … supplier power, buyer power, threats of substitutes, and barriers to entry and exit … and considering how they have changed over the past year or how they could change in the future is about understanding who’s playing, and winning, in the industry and thinking about how you can minimise any negative impact or make the positives work to your advantage.

One of the most frustrating aspects of running your own business is the number of things outside of your control that affect the success of your business. Many of these things happen in the external operating environment which is why it’s important to understand what is, or could be, happening in your external environment. We are going to look at how a PEST analysis can help with this.

PEST analysis is a tool that helps a business to understand the bigger picture. It helps provide insight into the way the market is changing, what is driving that change, and, if used well, how the business can take advantage of the change. PEST is an acronym for Political, Economic, Social and Technological. The analysis examines changes or trends in each of these areas.

Political is often grouped with Legal and looks at changes that may be occurring due to government structures, government policy, regulatory bodies, legislation … to name just a few.

Economic covers things like interest rates, inflation, unemployment, and consumer and business confidence. Think about the impact of exchange rates for example. For those of you importing & exporting the changes in the AUD will have either positive or negative effects on either your cost to import or the revenues from your exporting.

Changes in interest rates may affect your costs if you have significant borrowing but it can also affect business and consumer confidence which can affect your income. Regular analysis of economic factors such as these helps the business to identify any adverse effects or potential opportunities and plan for them.

Social aspects of the external environment are things like demographics, birth and death rates, consumer preferences, or environmental changes. The recent trend towards living a healthy lifestyle has seen many changes to the groceries we buy, and the menus in restaurants and take-away food stores. It’s also seen a significant increase in the number of gyms, and greater demand for people in occupations such as Personal Trainers.

Technological aspects of your external environment include things like technology advancement and the rate of change, increases in bandwidth, and investment in research and development. This is an aspect that is changing at an exponential rate, bringing growth or challenges to many industries.

So, PEST analysis is a useful tool when examining your external environment. While the main point of using a tool like this is to become aware of and identify things that could negatively affect the business and prepare for them, you can also use it to identify opportunities that the business could leverage to become more successful. It can be helpful to articulate to stakeholders what’s happening and show them that you have a clear understanding of what’s going on in the market.

Now we can only take advantage of external trends and events through effective uses of resources within our own business. To do that properly, we need to understand what we are good at and what we could do better. Then, combining our own unique position with the analysis of the market, what are the things that stand out as opportunities and threats?

To help gain a better understanding of our internal environment we can use a SWOT analysis. SWOT analysis is a tool that helps a business to look at the fit between its internal resources and capabilities, that is, its strengths and weaknesses, and the possibilities that exist, its opportunities and threats. As a tool it helps to evaluate whether you have the resources, skills and capabilities needed whilst at the same time allowing you to analyse the effects on the business if you don’t.

Strengths, of course, are those factors that make your business more effective. Weaknesses are those things that can limit a business’s effectiveness or competitiveness. Opportunities are favourable situations or trends that can improve the business, while threats are unfavourable situations or trends that can impede or jeopardise the business.

For example, a small software company that has skilled salespeople with strong client relationships as a strength, but possibly has a weakness of a limited product range. This can be viewed as a threat as there are many substitutes that are rapidly entering the market; however, it could also be viewed as an opportunity to use those relationship and negotiating skills to expand their supplier relationships and the product range.

Using a SWOT analysis to examine your business’s internal environment helps to minimise threats, reduce weaknesses, use strengths, and make the most of opportunities.

As we said at the outset, business planning shouldn’t be viewed as a once off event but as a continual process or journey. It often starts with ‘Setting your objectives’. This part of the process begins with you knowing your purpose or why your business exists, setting it out in your business plan, and then setting the overall goals for your business.

Next you ‘Implement tactics’. The selected tactics or tasks are ‘how’ you are going to achieve your goals. This is about putting your business plan into practice and making it happen. Then it’s important to ‘Monitor progress’. The performance measures that you have set yourself help you understand whether your actions are really achieving the goals that you want them to. If they are – big tick – everything is going well. But if not…

You may need to ‘Modify’. If things aren’t going as well as you had hoped, then one of two different things may be the problem. Either the plan needs changing because it doesn’t quite fit what you are trying to do, or perhaps your customers or operating environment have changed. This means you may need to change how you are trying to implement the plan. By reviewing how you have performed against your stated goals – you can then make appropriate changes to give you your best chance of success.

Regularly reviewing your business plan is an important part of optimising your business planning and business performance. So, how often should you review your plan? Really, as often as suits you, depending on how quickly things change in your industry or market. But as a suggestion, it is worth thoroughly reviewing your plan yearly. This helps to ensure that you are still working towards your ultimate goals.

Then, once a month or once a quarter, it is worth checking how you are going … making changes if you need to get back on track.

Business planning is an essential part of successfully achieving your business goals. Today has been about optimising your business planning. In this session we have introduced you to a number of tools that can help examine: • the all-important strategic considerations, • the market you operate in, that is your external environment, and • how your business uses its resources, the internal environment.

By following a process of regular review, you can step out of the day to day running of your business and take a helicopter view. Ask yourself questions like “What is it that I am trying to achieve? What does that mean to my customers? And am I living up to my brand promise?” Sometimes you may not change anything, and that’s okay. The most important thing is that you have given yourself the opportunity to review your plan and ensure you’re still on track to achieve your goals.

Thanks for watching ‘Optimising business planning’. I trust you found the video helpful, and I encourage you to check out the other resources on the Davidson Institute website to help build your financial confidence. Bye for now.