Tag Archives: business plan

Examples: When predictable is risky

In the last post I proposed that sometimes predictability is risky: when the “predictable outcome” is failure, you’re better off taking a chance on something that at least has a chance of success. We also discussed two examples: the playoff for MTG Player of the Year, and the last-second game-winning shot in a sports competition.

But there are lots of examples of risky stability

Lousy jobs
Hate your job, but stick with it because it’s “safer”?
Probability you’ll hate your job if you stick with this one: 100%
Probability you’ll hate your job if you look for another one, or make your own: 50%

Your job has much greater risk of frustration, depression, and misery.

New businesses
People like to make the same kinds of businesses as already exist, because they know that there’s a demand for it.

It’s a good idea to make sure there’s demand for your business. But doing so by competing in a crowded field is kinda crazy. Do you really want to be competing with Starbucks? With Wal-Mart?

The thing is, let’s be honest: you can’t compete with Starbucks. Almost guaranteed. If you go up against them, you will fail.

If you start a totally crazy business — like birthday parties for pets — there’s a chance you will fail. There’s also a chance you’ll find an untapped market that you can dominate easily since you have no competition.

Probability of succeeding with a coffee shop: 1%
Probability of succeeding with a birthday party for pets business: 50%.

New Products
When making a new product, most companies like to copy their competitors. Making an MP3 player? Look at what your competitors are making, and make a device that’s as close as possible to that.

Who didn’t follow that advice? Apple. I mean, look at the math. If you make a knock-off product, you’re guaranteed to sell a few units, but you’re guaranteed not to sell very many, since someone else already beat you to the market. And you’re going to spend millions on R&D and advertising. The only way to make money on that is if you sell lots of units, not just a few. Apple put the effort in to make an MP3 player that was completely different from their competitors’, and hit it out of the park. (Yes, there were MP3 players before iPods. They just didn’t catch on. Companies copied them anyway).

If the iPod had been a flop? Well, you’re investing millions anyway. Honestly, the difference between losing $1,000,000 and losing $900,000 isn’t that significant, and that’s what you’re risking with the knock-off product. Whereas the difference between making $100,000 and $10,000,000 is pretty darn significant.

Probability of making money on a knock-off product: .5%
Probability of making money on a brand-new, unique product: 50%

Are you in a situation where predictable is risky?

Still, there are a lot of situations in which predictable really does mean safe. How do you tell?

With this simple questionnaire! (Free Risk Analysis Download)

What’s the downside risk? If it all goes to heck in a handbasket, if Murphy steps in and your worst nightmares come true, what do you stand to lose? Money? Time? Reputation?

What’s the magnitude of the downside risk? Whatever you stand to lose, how much do you stand to lose? Usually this is your initial investment: if it will take you four hours a week to write a blog, then you stand to lose four hours a week. If it will take $1,000 to get in on this investment, you stand to lose $1000. If it will take you $100 to start this business, and you’ll be able to tell by the end of the month whether it will succeed, then you stand to lose $100, a month, and the respect of all your so-called friends who are lining up to say “I told you so”.

What’s the probability of failure?
In most cases, you’re making this up. I’m not asking for an exact number, just a gut feel. Very high? Fairly now? Fair-to-middling?

What’s the upside risk?
If this succeeds, what would you get? Money? Fame? Fast cars? Attractive members of your preferred sex volunteering to clean your house?

What’s the magnitude of the upside risk?
If this took off like you secretly hope for, if everything went right
and you were an overnight success, how much of that awesome stuff would you get? Hundreds of dollars? Hundreds of thousands of dollars? Your name known in every household in your town? Your country? The world? (I’ll leave the attractive housekeepers to your imagination).

What’s the probability of success?
Again, this is normally impossible to calculate, but make your best guess. Probable? Not bloody likely? Yeah-maybe-possible?

What’s the alternative?
Finally, what will happen if you don’t take this risk at all? What if you let sleeping dragons lie, ignore this opportunity, and continue with your life as it is right now?

Whatever units you used for your upside/downside risk (dollars, days, hot chicks/hunks), express the status quo in those units. How much money will you have if you continue with this job/ don’t start a business/ buy apple products instead of apple stock? How many fast cars do you have currently?

Put it all together

  • If the downside risk is significantly worse than the status quo, and the upside risk is pretty low, then this is a stupid risk. Stick with what you know.
  • If the downside risk and the upside risk are about the same distance from the status quo, then check the probabilities. And ask yourself: do I feel lucky?
  • If the upside risk is significantly better than the status quo and the downside risk is about the same as the status quo then this is a great opportunity. You are, as Julien Smith would say, being a *@^#*@ wuss. Get off your butt and take a chance.

Resources for Further Reading
Play it safe … and experiment

Case Study: Should this business proceed?

One of my projects this year is helping a friend of mine start a business that he’s always wanted to run. The business centers around a common interest, and we have very complimentary (ie non-overlapping) skill sets, so it’s a good partnership, and one of his other friends is the partner in charge of the practicalities of business/legal aspects and of developing an online presence.

The first step of starting a business, of course, is to determine whether or not you actually want to start the business. We got a team together and discussed everything from location and possible promotions to the details of which products to sell and how many employees we’d need. Then we put together financial projections to figure out how much money we’d need to start, and how much money we’d need to make in order to pay that back, and whether that seemed possible. The numbers come out right in the middle: success isn’t obviously impossible, but it’s not guaranteed either.

At this point we face four possible options:
1) Drop the project entirely.
2) Modify our plans and assumptions to make success more likely
3) Proceed with caution, and see what develops
4) Damn the risk and full speed ahead!

Let’s examine them each in turn:

Drop the Project

The big and obvious advantage to this one is the lack of risk. If we don’t even try to start the business, we can’t possibly lose any investment. Just how advantageous that really is depends on how much investment we’re putting in. In this case it’ll take $20,000 – $50,000 to start up the business, and $10,000/month to run thereafter. So we’re looking at potential loss of several thousand dollars (although it’s unlikely that we would fail to make a single sale, it is possible, so that’s the worst-case scenario), which could be guaranteed not to happen if we simply stop here.

The big and obvious disadvantage to this one is that my friend will have to give up running the business that he’s always wanted to run. Just how disadvantageous that really is depends on how much he has always wanted/still wants to have this business. Despite illusions/stereotypes of coolly logical CEOs, this business decision has to be made emotionally: how much does it matter to you?

Modify our plans and assumptions to make success more likely

The financial projections provide for a salary for each of the partners; if we could get by on a smaller salary, or support ourselves in other ways while the business gets going, that would lower the financial risk, and make it easier to break even. Obviously that won’t help unless we can then increase the business’ earnings so that we can take salaries, but it does help smooth out the start-up/transition period.

We could also figure out some way to test the market: by selling our products in another store, which would provide some information on demand in the area; by getting hard data on the walk-by and drive-by traffic in our proposed location, which would help us estimate the required conversion rate; by doing surveys in the neighborhood to estimate demand; by spending some money now to start our proposed promotions and measure the resulting demand. These would let us get a better feeling for how accurate our financial projections are, and to revise them as necessary.

We could change our business model to one that’s less capital-intensive, such as online affiliate programs, online drop-ship options, etc.

The advantage of this method is that it gets us almost as little risk as option #1, but without giving up the dream.

The disadvantage is that there may be really long delays while we tweak and measure and brainstorm and adjust, in order to get the risk within acceptable boundaries.

Proceed with caution, and see what develops

This is fairly risk-intensive: it involves starting up the business as proposed, albeit making as few expenditures as possible until we have a feel for what kind of income we can expect to receive. The partners should discuss what situations we might face and how we would respond, so that we don’t get caught completely flat-footed when something comes up. We should also define the limits of our experiment: under what circumstances (number of months, certain level of income, certain number of sales, etc) will we declare ourselves finished and take steps to dissolve the business?

The advantage is that we have this plan in place, so we can proceed immediately (well, as soon as we raise the capital, anyway). And although it is risk-intensive, we know what we’re getting into, and we’re prepared to make course adjustments

The disadvantage, obviously, is the possible loss of $30,000 – $170,000.

Damn the risk, full speed ahead

Or we can proceed just as we planned, bet it all on one roll of the die and see if our current business plan is perfect.

There are no advantages to this plan; it would be stupid.

The only reason I bring it up is that most people, when they’re deciding whether or not to start their own business, create a blog, write a book, or look for a new job, think that it’s an all-or-nothing proposition. Either you drop the project entirely or you implement your ideas without any room for reassessment and adjustment.

Remember that you got this far by experimenting, observing, and learning. You can continue forward the same way.

And your final answer?

There’s no way for one person to make this decision. There’s no clearly right or wrong answer.

When deciding whether to proceed with your business, you have to consider all of the above: what’s the risk? How much do you want to do this? What could you do to adjust? How would that affect the risk? What would happen to you if the works-case outcome occurred? What would happen to your partners? What would you do in that scenario? What’s the probability of that outcome? What’s the probability of success?

And given all that, what do you want to do?

Who’s the Best?

There are lots of things in life where you can clearly state what is “best”: in class, whoever scored highest on the test is the best student. In soccer, whoever won the World Cup is the best team. There are enough of them, in fact, that we frequently forget how many things in life cannot be clearly defined to be “best”.

Most pertinently, “best” can almost never be determined in business. When I was in college, “best” to me meant cheapest. When I graduated and got a “real job”, I was able to afford more expense, and “best” included durability and quality and price per unit (Now that my graduate student loans are coming due, “best” may go back to meaning cheapest.) If you’re handling neurotoxins, “best” means “safest”. There are lots of ways to define best, which means there are lots of ways to be the best.

If you can’t be the cheapest, can you be the fastest? If you can’t be the most insightful writer, can you be the funniest? Use what you do best.

Step 1: Review Last Year

This post is an addendum to the Annual Planning series written earlier this year. That series was written after I’d done my first annual planning retreat, but before I’d done my second, and it was clear that someadditions to the process needed to be made. First off, you probably want to review how last year went before you charge headlong into planning next year the same way.

Step 1: How did it go?

Look over your planning notes from last year. What did you hope to accomplish? Write those down in the left column below. Did you accomplish them? If you only accomplished partway, put down a fraction: ½ accomplished, ¾ accomplished, or whatever. Also jot down whatever notes you think might be helpful – project changes and so on.

Objective Completeness Notes

Now with your partner (if you have a partner) or in a notebook (if you’re doing this alone), talk about the year overall, and your objectives in particular. Do any patterns emerge that you should take into account when planning this year? For example, the first time I did this, I determined that I tried to tackle WAY too many projects in my first year. For my second year, I decided to limit myself to five projects at a time.

Highlight, circle, or in some other way indicate which unfinished projects you would like to roll over into consideration for next year’s plan. Then you’re ready for step 2 (which used to be step 1): External Analysis

Annual Planning Addendum: Notes from year two

Last week I had my second annual planning retreat — it marked the first time I’d done my annual planning process when I’d already done it the year before. So I can now speak to the benefits of the process from actual experience, and I thought it would be worthwhile to do so.

Data

Last year I set 25 objectives. I intended to achieve them by working on 7 projects (things you can work on with a definite endpoint, like “Make a website”), and 9 policies (things you do all the time, like “Run 3 times/week”).

Of those, I achieved 9 objectives, or 36%; I completed 4.75 projects, or 67%, and I stuck to 4 policies, or 44%.

Interpretations and Inferences

The first thing we did after our review was to celebrate. Despite the low percentages – a clear failing grade in any educational institution, which is another way that life differs from middle school – we were both proud of what we had accomplished, and we both agreed that it had been one of our most productive years ever. Goal-setting is useful even when you don’t accomplish your goals, because it give you focus.

The low percentages indicate that we still need to “dial in” how much can be accomplished in a year. I actually suspect that my 2014 self would be able to accomplish everything I’d set out to do, but my 2009 self wasn’t that disciplined or organized yet. This caused something of a depression as we compared our “most productive year” to the things we’d hoped to do in a year, and how big that discrepancy was. And yet I don’t want to scale my goals down, because I think I can learn to do that much.

What we did instead was to set goals that are more process-oriented. My boyfriend proposed to me while we were up there – we both agreed that our top priority was to keep our relationship strong and to improve it further. We both want to have more peace in our lives and to become the best possible version of ourselves — that was the second priority. I want to help people learn how to monetize themselves; he has his own vocation. What all of these goals have in common is that they set a clear direction, without specifying how far in that direction we must travel. If I don’t make it as far as I thought I could, that’s OK. If I make it much farther than I thought I could, that’s OK, too. I don’t have to make arbitrary guesses about how far I can go

I could do that this year, because I’d had a year to shake out which goals were vocations, and which were just projects. Last year’s objective list was a jumble of

  • vague goals,
  • of projects that would be nice to complete someday,
  • of projects that would clearly take multiple years (maybe a lifetime),
  • and of projects that were vocation-worthy, but aren’t my vocation.

This year I have it pared down to several overarching lifetime-projects, and have selected less-than-one-year projects to support those objectives.

But I don’t think I could have done that last year, because I didn’t have the data I needed. My first year of annual planning was kind of a data dump, that gave me a chance to list every daydream and career-like notion and impractical fancy that I’d ever had. I wrote it all down, and tried it all out. And over the course of the year, I was able to learn what really mattered to me. It was obvious in the list of projects that I’d worked on (because they’d excited me enough to receive sustained energy) and the ones that had died out from lack of interest. When compared to other, new items on the list this year, it became obvious that several of last year’s objectives were really sub-projects of another lifetime-project – a connection I couldn’t see until I’d spent a year experimenting. I think this kind of focused, pared-down planning can only be done in the second year of this process.

Recommendations for Future Work

The original Annual Planning post was written during my first year of planning, and was written for people who have never set out to do this kind of thing before. And I think that’s a fair assumption in most cases – I’d never done that kind of thing before, and people look at me funny when I explain it. But obviously some things need to change for the second time around: we added in a review of the previous year, and modified the goal-setting process to accommodate 2nd-year planners. I’ll discuss those changes in the next few posts.