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Why is Our New Venture Not Making Money?
:
By John R. Stephenson and Alan R. Caron


Reproduced from the January 1999 issue of The Electricity Journal


Perhaps you really do not understand the market? Maybe you have not employed the right expertise? Could the corporate structure be impeding the new ventures focus? Could it be pricing? An operational cost structure that is out of line with those of similar successful businesses? Or maybe critical success factors are not clearly understood. Timing is wrong. Too small? Not fast enough to scale? Any one of these may explain why there are no profits to show, or it may be one of many other factors.

The answer probably lies within the pages of your business plan for the venture - if you have one. Unfortunately, many utilities have undertaken new ventures with a business plan that has not adequately addressed all of the issues necessary to assure a high probability of success. Even more dangerous, some have proceeded with virtually no planning at all, going on gut feeling alone. Some companies have a good strategy and a decent business plan, but fail to provide the resources necessary for successful execution.

Launching a new venture is among the most daunting tasks a utility can undertake. Even with the best planning, fine management, and good products and services, lucky foresight is often a key ingredient of achieving success, according to acclaimed strategist Gary Hamel. Still, management must exert extra due diligence in building a sound business plan and supporting strong execution, both of which are among the controllable aspects of achieving success.

Here we will examine some of the issues to be addressed before launching a new venture. In the end, it is not the plan that is important, but the process of creating the plan and understanding its contents that really creates value and a higher probability of a successful venture. As one entrepreneur said, “Starting a business is easy except for the thousands of details that need to be addressed.”

The planning process ensures that the critical elements of business success, the so-called key thought processes, get internalized. Many companies just consider the business plan a useless exercise to get out of the way so the business can get started, because of blindness caused by overwhelming zeal of the champions of the new venture. This often can be a formula for disaster because of the failure to understand the nuances of the business, the marketplace, competitors, and customers.

A great deal of time needs to be devoted to creating a “winning strategy”. Many new ventures in the utility industry today are following a strategy of selling more than the competition for less. Clearly this is difficult to view as a winning strategy. One CEO we know sent the department heads of some of his business units back to the drawing board six times and more because they were unable to articulate a clear winning strategy. As a result of the CEO’s determination to obtain a winning strategy for each of his businesses, he was rewarded with a threefold appreciation in the price of his stock over a 5-year period. If you cannot find a winning strategy, maybe you should consider not entering the business.

Many new ventures fail because the parent company has not given them the freedom to flourish. Small entrepreneurial units are held captive to various forms of corporate bureaucracy. New talent is hired but governed by the rules of the old guard. As an alternative, they could agree on 1-, 3-, and 5-year plans and let the new venture execute and create its own policies, procedures, and systems necessary for success. Not that synergies among units should be discounted, but care should be taken so that they do not impede the unit’s ability to tackle its marketplace effectively. Too much interference and too many restrictions by the parent company may actually pose a far greater threat to success than too little parental guidance.

Many times the utility wants a new business venture to serve the corporation’s short-term needs at the expense of creating a business venture that could succeed in the larger market context. Sometimes the broader, more profitable market is served to the exclusion of the parent company’s needs – but the benefit is a successful commercial venture.

A joint venture or partnership arrangement can fail for similar reasons. The Tele-TV interactive service, a venture between Bell Atlantic, Pacific Telesis, and Nynex, failed mostly because the board was comprised of the respective three CEOs, who could not agree. They each wanted the business to do what they thought best for their individual markets. In fact, Tele-TV’s management had been very successful in implementing a business strategy that they had developed but that did not fit what the parent CEOs wanted (at least not all of them). With over $100 million in revenue ready to book, based on the Tele-TV operating management’s strategy, the business was discontinued.

There are many critical questions that, if left unanswered, may lead to eventual disaster. Even the best plans and the best management may still not be successful in the long term without a strong dose of that “lucky foresight” we mentioned earlier. This is an important point worth repeating, because even the best plans for new ventures are not without considerable risk.

Many questions concerning mission and corporate philosophical fit require soul searching, but are usually answered more easily if the parent company has a well thought out strategic architecture. How the business fits into the company’s overall vision, its corporate image, how it will be perceived by regulators and other stakeholders, how it will enhance the company’s ability to compete in existing businesses – all must be considered. A key question here is: Are potential earnings or other benefits significant enough to warrant the time, effort, and corporate resources required to direct the business? There are many examples of billion-dollar companies fooling around with ventures that do not have the potential to show even modest returns. The management effort required for a venture with $5 million in potential is almost the same for one with $500 million in potential.

We know of one case where a headhunter was seeking a CEO to run the newly created unregulated subsidiary of a utility. The successful candidate for the position was expected to grow three separate businesses from zero to $500 million in 5 years. When pressed for an example, in any industry, where an executive grew a business opportunity from zero to $500 million, our headhunter friend was at a loss. This expectation was even more preposterous when you consider that the parent was a company with revenues of less than $1.3 billion. In addition to its relatively small size, he parent company did not have either the cash flow or the culture to facilitate the very aggressive acquisition strategy required to attain that lofty goal. In fact, the original thought was to build the venture without completing major acquisitions.

This is a perfect example of a company establishing unrealistic expectations and setting goals that conflict with management’s traditional paradigms. Launching even one successful venture in a culture where launching new products and services, new ventures, and the like has not been a mainstay would be a tremendous achievement; launching three successfully…a miracle.

What truly new winning strategies have been introduced in the utility industry since Enron brought Wall Street to Houston? Nothing of any significance. Mostly, companies are pursuing a “sell more for less” strategy in their unregulated businesses. That makes it tough to be highly profitable unless you are among the very largest and most efficient. Even then it is a difficult challenge, and companies with a consumer focus must constantly look to re-invent themselves and find new ways to create value.

Identifying the target market is not as easy as it may seem and requires a great deal of effort. Questions that any new venture should answer include: Who are the ultimate buyers? How can they be identified or reached? What is the market size? Local, regional, national, international? What influences their buying decisions? How and when is the product adopted? How can consumers be sold? What is the buyer’s profile? How can the target market be segmented? What are the economic conditions and expectations of the target market? How are the buyer’s attitudes, values, habits, or overall behavior changing? Are there intermediate buyers, and if so, are these channels best to use? Although this partial list may appear simple, it is in reality not so simple to answer. Trying to find a shortcut to this process of information gathering and assimilation can lead to failure. The corporation that is considering launching a venture must understand these details and many others to know whether the venture is, in fact, sensible to launch.

The potential demand for the product or service must also be scrutinized. Key questions to be answered prior to a launch decision include: How unique is the product or service? What image should be created for it? Will sales be increased through more frequent use? Can we find new buyers or new uses for this product? What other products or services directly and indirectly compete? What makes our offering better or different? Do we have a sustainable competitive advantage? What needs do our product or service satisfy and how well do they do it? How do prospective buyers perceive the product? The importance of checking to see whether these and similar questions can be answered with credible support rather than gut feeling cannot be overstated.

One typical weak spot in planning a venture is in the area of competitive analysis. Even at Duke Energy, we have heard senior executives admit that they greatly underestimated the competitive response in certain areas of their business. A whole list of questions must be answered in this area before undertaking a new venture.

Defining the 5-year market potential is a challenge that most new ventures fail to meet. Most plans show the typical hockey stick growth scenario, but the ventures end up with the stick lying on the handle instead of the foot. Key questions: What is the learning curve required for the product? What will it take to educate the consumer as to “the need” for the product or service? Or does the consumer already understand it? What will be the retention rate? How much repeat business should be expected and at what intervals? What are the relevant numbers in units, dollars, and margins by product, service or even by market? What is the expected market share and that of other competitors (name them) in 1, 2….5 years? Again, answers must be supported with credible data and/or methodologies. The data may be unclear; much may be speculative – but hard, detailed work here is critical to get a handle on the potential. Too often, top-line, unsupported information is used for decision-making.

Sound market and product/service strategies are critical and many times are lightly treated. What is the product/service mix, and how well will each component sell? Does the selected array of products/services have the optimal breadth and depth for the markets that have been targeted? Should the scope be narrowed to exclude some markets, products, or services? There are also positioning issues, evaluation issues, quality assurance issues, liability issues, distribution channel issues, and many others.

Promotional mix is always a curious area. What is the branding strategy, advertising objectives, and media mix? What is the marketing message? The image to be created? How will the venture be promoted? Possibly with incentives? Direct mail? Telemarketing? Newspapers, television, and radio promotion? And the real fun part: How do we set the appropriate budget for this, and then measure the results? Remember that matching what is said to what is actually delivered is absolutely critical. UtiliCorp learned these lessons the hard way with the launch of Energy One.

We have seen consumer ads for new ventures talking about customer focus, rapid response times, etc., only to find the opposite when telephoning the newly promoted venture: phone-menu options that do not match your needs, long queues for available representatives who turn out not to be able to help you and accidentally cut you off in trying to transfer you to someone who can. The ad for top-notch service just does not ring true, however high the media expenditure. External alignment – being able to deliver what you advertise – is critical in launching a new venture.

Pricing also fails to get adequate up-front attention. These may be the toughest questions of all, especially when new products are being brought to new markets. And how about product support (training, adequacy of staff, clerical and technical support, claim and dispute handling, and clerical/administrative issues) and operational requirements (equipment, systems, properties, trademarks, patents, licensing, and inventory)? Human resources, compensation systems, capital requirements, internal and external risks, timelines, and exit strategies?

Underestimating the total costs associated with the venture is another area where problems often arise. Many times the right questions are not asked, let alone answered. In observing many start-ups, we have found, as a rule of thumb, that as you review the business plan financials, you might be wise to divide the revenue estimates by three and multiply the cost estimates by two to get a truer picture of the final results. Certainly that is not true for all businesses, but it introduces a good measure of realism that many times is given short shrift in the business planning process as management zeal to start the business creates overoptimistic financial projections.

There is no question that wrestling with all these issues is an arduous task. But the tough reality is that in most cases these critical success factors are inadequately addressed. If you are preparing a business plan for a relatively new venture, you would be wise to see whether early on your organization can navigate its way through the critical questions for business survival before the answers are found out the hard way – through a costly failed effort and a painful learning experience.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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