Action Business Planning – ABP:
A Brief Description
This document presents a brief description of
Action Business Planning
and how to link it with
Formal Business Plans.
Darius Mahdjoubi, Ph.D.
[email protected]
IC2 Institute of UT-Austin,
St. Edward’s University, Austin, TX
February 2009
© Darius Mahdjoubi, 2009
Introduction
• This presentation introduces Action Business Planning, which is a
migration from Formal business plans.
• This presentation does “not” advocate that academic courses or business
support programs should abandon Formal business plans; rather it calls
for dynamic interactions between Formal and Action Business Plans.
• I teach Action Business Planning in an academic course, which includes
20 hours of presentation. Today I am going to squeeze the whole course.
Probably I will make more questions for you! Academic courses—in
business, engineering, law, etc.—teach students on how to write, read
and interpret Formal business plans.
• Many studies demonstrate that Formal Business Plans often act more
ceremonial and protocol (code of behavior) than practical.
• A growing number of academics and practitioners are questioning the
validity of Formal Business Plans.
• A recent article of The Wall Street Journal reviews the shortcomings of
the Formal Business Plans.
2
1
Do Start-Up Really Need Formal Business Plans?
• A recent article in The Wall Street Journal asked
“Do Start-Up Really Need Formal Business Plans?”.
The Wall Street Journal – Jan. 8, 2007, Page B9
http://startup.wsj.com/columnists/enterprise/20070110-spors.html
3
Formal Business Plans -FBPs:
A Linear Structure
Sales estimate is the Achilles heel of Formal Business Plans.
y
log
no
ch sh
Te P u
Market
Study
Sales
Estimate
Capacity of
Production
Facilities
Planning
Personnel
& Managers
Ma
r
Pu ket
ll
Product
Description
Formal Business Plans assume future patterns of sales for a
venture that does not exist is precisely predictable!!
Financial
Analysis
Find
Inve$tor$
An linear or a S shape pattern of growth is common in many
Formal business plans. The linear or S model of growth is “rarely”
applicable in the real world cases.
4
2
Sales Estimates in a Business Textbook:
New Venture Creation (Timmons and Spinelli, 2004, 6th Edition)
Page 266
500000
400000
Sales $
Sales $
Page 43
4000000
3500000
3000000
2500000
2000000
1500000
1000000
500000
0
200000
100000
0
1
2
3
Yearly
4
1
5
2
3
4
Quarterly
Page 358
50000
5
6
Page 380
1200000
40000
1000000
30000
800000
Sales $
Sales $
300000
20000
10000
600000
400000
200000
0
1
2
3
4
5
6 7 8
Monthly
9 10 11 12
0
1
3
5
7
9
11 13 15
Monthly
17
19
21
23
The book contains 5 cases. In 4 cases sales estimates are linear, compounded and
predictable. The 5th case follows a path that is predictable and cyclic.
5
An Alternative Model:
Categorization of Major Factors
for Venture (New Business) Development
• There exists a wide range of factors that impact business
(venture) development in a very complex manner.
• Factors that affect business development, however, can be
categorized into three major groups:
– Variable Factors: We know about and have some control
over Variable Factors.
– Structural Factors: We may know about, but have very
limited control if any over Structural Factors.
– Unknown Factors: We do not know about unknowns and
face them unexpectedly.
6
3
• Variables:
1. Innovation
2. Styles of Venture
Development
3. Financial Capital
Styles of Venture
Development
Action Business Planning Variable Diagram
n
atio
v
o
nn
Fin
an
Cap cial
I
ital
The three variables (Innovation, Styles of Venture Development and Financial
Capital) are in three dimensions. Action Business Planning also includes four
structures that are not illustrated here.
We can also imagine the three variables of Action Business Planning as a tripod,
that makes a non-linear structure.
7
Styles of Venture Development
Styles of Venture
Development
Styles of Venture Development is a
pillar of Action Business Planning.
Styles of Venture Development acts
like a third dimension to the linear
models of business development.
The new dimension allows
entrepreneurs to seek a wide range
of alternatives beyond conventional
line of technology to capital.
Likewise in a three dimensional
globe, it became possible to reach
East by going toward West, or
indeed many other directions.
I
n
atio
v
o
nn
Fin
an
Cap cial
ital
8
4
Cash-flow as a Surrogates for Development
• Cash flow is the difference between what you earn (revenue, sale)
and your spend (cost). Cash flow is a better surrogate for
Development than only sales or revenue as.
• Cash-flow may be both negative and positive, and being negative or
positive cash flow makes a huge difference in business development.
• A business with continuous negative cash flow can not sustain.
• The S Model for Business Development uses Sales as a Surrogate
for Development.
• Using Cash-flow as a surrogate for development, there are two
threshold in the early stages of venture development: Startup and
Sustainable Cash-flow (Sustainable break-even point).
• A combination of cash-flow and sales provides new vistas in
business development better than only sales or only cash flow.
9
New venture development is
punctuated by two critical events:
Startup and Breakeven (Sustainable
Cash-flow).
(Cash Flow) $
The Early Stages of Venture
(New Business) Development
Start-up
Breakeven
Valley of Death
Cash flow is the difference between
revenue (earning) and cost (spending).
Ideation
Based on cash-flow, the early stages of
venture development consists of:
Ideation (prior to Startup),
Survival (between Startup and
Breakeven) and
Growth (After Breakeven).
What is required at one stage is
the equal and opposite of what
may be required at the next stage
in the company’s development.
Geoffrey Moore
Survival
For more information, see the “Venture Development Model”.
Growth
Time
10
5
High-Growth versus Lifestyle Businesses
Entrepreneurship textbooks and studies often classify new
businesses (ventures) into two dichotomy groups: High-growth
versus Lifestyle.
Source: New Venture Creation (Timmons and Spindelli, 2007, 7th Edition), Page 259.
The emphasis of mainstream entrepreneurship text books is often on
the “high-growth ventures” and how to look for financial capital from
external sources to initiate new high-growth ventures.
11
Styles of Development for New Venture
New ventures during their Survival stage of development
are classified under three groups:
* High-Growth – Rocket Ventures
* Organic – Gazelle Ventures
* Lifestyle – Turtle Ventures
12
6
High-Growth - Rocket Ventures
$
Sales
(Cash Flow) (Sales)
Startup
High-Growth Rocket Ventures
Break-even
$
Cash-flow
$ Survival
Ideation
Growth
Time
$
Deadline for First
Major External
Investment
$
$
Major Investment
Venture Mortality
High-Growth - Rocket ventures in the Survival stage create substantial
debt burden to get the momentum to enable them to have a high rate of
expansion. Rocket ventures seek “all or nothing” and “high risk and
high reward” strategies.
13
Slow Lifestyle Turtle Ventures
(Cash Flow) (Sales)
$
Lifestyle - Turtle Ventures
Startup
Breakeven
$
Sales
Cash-flow
Time
Ideation
Survival
Growth
$
Major Investment
Venture Mortality
Lifestyle - Turtle ventures in the Survival stage follow slow and cautious
strategies that seek longevity. Lifestyle - Turtle ventures in the Growth
stage intend to grow slowly to become “Small Businesses”
14
7
Organic - Gazelle Ventures
$
Startup
Sales
$
(Cash Flow)
Fast Organic Gazelle Ventures
Breakeven
Cash-flow
Time
Ideation
Survival
Growth
$
Major Investment
Venture Mortality
Organic - Gazelle ventures in the Survival stage seek resilience. In the
Growth stage, Gazelle ventures intend to grow fast.
Organic - Gazelle ventures in their Survival stage behave similarly (but not
identical) to the Turtle ventures, and in their growth stage behave similarly
(but not identical) to Rocket ventures.
15
Business (Venture) Development Examples
– Lotus (VC-funded)
– Compaq (VC-funded)
– Federal Express
– Microsoft (Self-funded)
– Dell (Self-funded)
– DHL (Self-funded)
– Wal-Mart (Self-funded)
– NI (Self-funded) )
– Digital (VC-funded)
- Small Businesses, Doctors, Lawyers, Art Galleries,
Individual Shops, Individual Restaurants, Taxis, etc.
16
8
Microsoft: A Gazelle Venture
In 1975 Microsoft [partnership] started out in Albuquerque, New
Mexico. MITS (located in Albuquerque) was the first company to sell
an inexpensive personal computer to the general public. In return for
the software, MITS gave Microsoft royalties and office space during
the first year. But after MITS was acquired by another company, it
stopped paying. We had no income for a year and were basically
broke. … After that episode, Microsoft has been perpetually cash-flow
positive. In fact, I developed a rule: We always have to have enough
cash on hand to be able to run the company for at least a year even if
no one pays us. The MITS experience, suddenly having no income,
made me conservative financially, a trait that persists to this day.
The Road Ahead, Page 44 (Bill Gates, 1996)
In 2004, Microsoft had more than $ 63,000,000,000 cash in reserve. It
still has no corporate jet, and Gates flies coach and business class.
17
Microsoft vs. Lotus Sales, $ Million
Microsoft vs Lotus Sales, $ Million
600
$ Million
500
400
300
200
100
M ic ros oft
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
0
Lotus
This diagram compares the patterns of development of two software
ventures: Microsoft versus Lotus: In 1984, two-years-old Lotus (a Highgrowth Rocket venture) had sales greater than 12 years old Microsoft (a
Gazelle venture). But soon after Microsoft surpassed Lotus.
18
9
Compaq vs. Dell Sales, $ Million
C ompaq vs Dell S ales, $ M illion
12000
$ Million
10000
8000
6000
4000
2000
Compaq
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
0
Dell
This diagram compares the patterns of development of two PC makers,
Compaq versus Dell. Nine years after their inception, in 1990, sales of
Compaq (a High-growth Rocket venture) was about 10 times more than
Dell (a Gazelle venture). But later, Dell surpassed Compaq.
19
(Cash Flow)
(Sales) $
$
% of New Ventures and % of New Jobs
for Independent Ventures: Some Estimates
Time
Growth
$
Survival
(Cash Flow)
(Sales) $
Ideation
Time
Survival
Growth
$
(Cash Flow)
(Sales) $
$
Ideation
Time
Ideation
Survival
Growth
Rockets ventures are about 0.2% of new
ventures, and they create about 20% of jobs
in new ventures. Rockets need extensive
amount of initial financial capital to start, and
they potentially can grow very fast.
Gazelles ventures are about 3% of new
ventures, and they create about 60% of jobs
in new ventures. Gazelles need modest
amounts of financial capital to start, but they
potentially can grow rapidly.
Turtle ventures are majority (90%+) of new
ventures, and they create about 20% of jobs
in new ventures. Turtles need limited
amounts of financial capital to start, but they
20
grow slowly.
10
Gazelle versus Rocket Approaches
for Venture Development
• Gazelle Approach for New Venture Development:
– Stay in the business as long as it takes.
– Keep going and you will get there, if you can survive.
– As long as you don’t lose the game, you will win it.
– What does not kill you, makes you stronger.
– Other name: “Under the Radar Strategy”, “Marathon”.
• Rocket Approach for New Venture Development :
– Grow very fast to reach IPO, liquidity, …
– Other names: “Get Big Fast”, “Home Run”, “Aggressive
Growth”, “All or Nothing”, “Gold Rush” and “Race”.
21
(Cash Flow)
(Sales) $
$
Formal Business Plans and Rocket Ventures
Ideation
Product
Description
Survival
Market
Study
Growth
Sales
Estimate
Time
High-Growth – Rocket Ventures
Capacity of Facilities
Production Planning
Personnel Financial
Estimate Analysis
$$ Find $$
Investors
The structure of Formal Business Planning is based on the premise that all
ventures follow a High-Growth – Rocket Venture mode.
Successful High-Growth ventures may make about 4 per 10,000 of total ventures!
22
11
Financial Capital to Start a New Venture
Sufficient financial capital is essential for venture development,
because before passing the threshold of break-even, new ventures rely
on the financial resources of the founders.
In theory, the minimum financial capital required to start a new business
(venture) equals the total (cumulative) cash-flow between startup and
break-even. A long and deep Survival Stage (Valley of Death) needs
more financial capital than a short and shallow Survival Stage.
Accordingly, the style of venture development deeply impacts the
amount of financial capital required to set up a new venture, to pass the
Survival Stage (the Valley of Death), to pass the Break-even threshold
and to enter the Growth Stage.
23
Financial Capital to Start a Rocket Venture
Breakeven
$
Startup
(Cash Flow)
• In the case of High-growth - Rocket
ventures, the minimum required
amount of financial capital is equal to
the area of the simple cash-flow
diagram between “Startup” and
“Break-even” point. This is also
called accumulated cash flow.
• A long and deep survival stage
needs more financial capital than a
short and shallow survival stage.
Ideation
Survival
Growth
Time
24
12
Financial Capital to Start
a Turtle or a Rocket Venture
(Cash Flow)
$
Startup
Breakeven
Time
Survival
Ideation
Survival
Growth
$
Ideation
(Cash Flow)
• In the case of Turtle and Gazelle
ventures the areas of negative cashflow and positive cash-flow between
“Startup” and “Breakeven” should be
taken into consideration.
• A fast path to the start of sales helps
Turtle and Gazelle ventures to improve
their cash flow patterns.
• Gazelle ventures may start with
modest amounts of financial capital, but
if they are successful they can grow fast
in the Growth Stage.
Time
Growth
25
Financial Capital Resources
1. Personal Resources of Entrepreneurs
Personal Savings and Lines of Credit
Personal Retirement Plans
Family & Friends Resources
Banks
Suppliers Credit
Customers Down Payment
1. Personal
Resources
Institutional Investors (VC, IPO)
Individual Investors & Angles
Corporation Investors
2. Loan/Credit
Philanthropy
4. Government and Philanthropy
Resources
Grants and Subsidies
Loan Guarantees
Tax Incentives
3. Equity
(Investment)
4. Government/
2. Debt (Loan/Credit)
Banks Loans
Suppliers Credits
Customers Down-Payments
3. Equity (Investment)
Institutional Investors (VC, IPO)
Individual Investors (Angels)
Corporation Investors
Personal Savings and Lines of Credit
Personal Retirement Plans
Family & Friends
Grants and Subsidies
Loan Guarantees,
Tax Incentives
26
13
Innovation: A Non-Linear Configuration
Major enterprise activities are categorized in 4 main groups:
1.
2.
3.
4.
How to Make: Technology
How to Sell: Customer/Market
How to Recruit and Retain Employees: Human Resources
How to Integrate Altogether: Organization
Development and innovation happen in all aspects of enterprise activities.
1.
2.
3.
4.
Technology Development / Innovation
Customer & Market Development
Human Resources Development (learning and creativity)
Organizational Development (change and leadership)
Innovation and development are not limited to technology.
27
The Innovation Map Model
Technology
Development /
Innovation
Organizational
Development
(Change /
Leadership)
Customer /
Market
Development
Human
Resources
Development
(Creativity &
Learning)
• The four aspects of innovation have
nonlinear relationship with each other.
They are distinct; though they are linked.
• Technology often holds the most visible
aspect of innovation and development.
Technology, however, is not necessarily
always the most important aspect of
innovation. Examples: Dell, Southwest
Airlines, Wal-Mart, Virgin Group.
•Organizational development often is the
most important one, it plays the role of
linking those to each other.
• The four aspects of innovation are
analogous to the continents of the World
28
14
(Cash Flow)
Time
Survival
Growth
Time
Personal Savings,
Personal Lines of Credit, …
Fi3.nEquity
an
Ca cial
pita
l
2. Loan/Credit
Family & Friends
Customers/Suppliers
Banks
tion
a
v
o
Inn
Growth
1. Personal
Resources
Organizational
Development
(Change /
Leadership)
Time
Survival
4. Government
Resources
Human
Resources
Development
(Creativity &
Learning)
Styles of Venture
Development
Ideation
Customer /
Market
Development
Growth
$
(Cash Flow)
(Sales) $
$
Ideation
Technology
Development /
Innovation
Survival
$
(Cash Flow)
(Sales) $
Ideation
Individual Investors
Institutional Investors (VCs)
Corporation Investors
(Sales) $
$
Variable Factors of Action Business Planning
Loan Guarantees,
Grants and Subsidies
Tax Shelters
29
Linking Action Business Planning and
Formal Business Plans
• Entrepreneurs may need to link their Action Plans and Formal
business plans, if they plan to apply for business loans to banks, or
seek financial support from professional investors (VCs and Angels)
or government agencies,.
• Next diagram demonstrates the main links between Action Business
Planning and Formal Business Plans.
• Making a Formal business from an Action Plan is like AAA Trip-Tik®
maps, they are a set of Roadmaps for specific routes, selected
among many alternatives that area maps suggest.
30
15
Linking Action Business Planning
and Formal Business Plans
$
(Cash Flow)
(Sales) $
Survival
Growth
Survival
Growth
$
Time
Ideation
3. Equity
2. Loan/Credit
Family & Friends
Customers/Suppliers
Banks
Time
Ideation
Product
Description
1. Personal
Resources
Growth
Individual Investors
Institutional Investors (VCs)
Corporation Investors
Survival
$
Organizational
Development
(Change /
Leadership)
Ideation
(Sales) $
Human
Resources
Development
(Creativity &
Learning)
Personal Savings,
Personal Lines of Credit, …
Time
(Cash Flow)
Customer /
Market
Development
4. Government
Resources
Technology
Development /
Innovation
(Cash Flow)
(Sales) $
$
Product
Loan Guarantees,
Grants and Subsidies
Tax Shelters
Market
Study
Sales
Estimate
Capacity of Facilities
Production Planning
Personnel Financial
Estimate Analysis
$$ Find $$
Investors
Further links between Action and Formal Business Plans are
discussed under Four Scenarios for the Survival Stage.
31
Audiences of Formal Business Plans
1. Commercial Banks
2. Institutional Investors (Venture Capitalists – VCs, Investment Bankers)
3. Corporate Investors
4. Angel Investors
5. Government Agencies/Philanthropic Organizations
6. Others
Each group needs a unique form of formal business plan.
* Commercial banks look for collateral and continuity.
* Institutional Investors look for clear exist strategies in, say 3 to 5 years.
* Corporate investors may be more interested in how the new venture
helps them to sell their products (e.g. case of Starbucks) or later to become
part of the corporations (e.g. case of Xerox investments).
* Angel investors may act like mini-VCs or long term active business
partners.
* Government agencies may be more interested in job creation than profit.
32
16