Have you ever thought about starting a business but don’t know where to start? Each December, National Write a Business Plan Month is an annual reminder for anyone thinking about creating a business to begin with a plan.
To learn more about writing a business plan, The Daily spoke with Sayan Chatterjee, a professor in the Department of Design and Innovation at Weatherhead School of Management.
Read on to learn some tips for writing a business plan from Chatterjee and how notable companies like Southwest Airlines have followed these guidelines.
1. Precisely identify your customer and know “why” they are buying from you not what they are buying.
Southwest Airlines has a profitable track record in an industry that is rife with bankruptcies, mergers and constant turmoil. For the longest time, Southwest did not offer many of the perks that airline passengers expect. However, if you are a commuter business flier who wants to absolutely count on a breakfast meeting in Houston, lunch in San Antonio and be home for supper in Dallas, day after day, then Southwest is the airline for you. This is because Southwest has more flights during the day than any other airline and has an enviable on-time record. However, if you want first class, meals or a through ticket with another airline you are out of luck. Southwest does not cater to those fliers.
2. Understand what it is that you offer that makes them want to buy your product or service.
Southwest was always asked by its investors and analysts why they did not increase their fares since the few competing airlines were charging four- or five-times higher fares. In a famous 60 Minutes interview, the then-CEO of Southwest provided the answer.
For a short-haul point-to-point airline the competition is not another airline but the automobile. Southwest priced their tickets to be sometimes lower than what it cost to drive.
As an aside, Southwest has abandoned many of these practices as they have decided to compete for the traditional business passengers. Consequently, there is very little difference between Southwest and other airlines fares since 2010 or so.
3. Clearly understand your profit logic. You can satisfy your customers and go bankrupt in a hurry if you do not design your business to deliver and capture value.
In the 1990s, many of the major airlines—including Continental, United and Delta—tried to copy the Southwest short-haul business model. They thought the secret to Southwest’s success was keeping planes full by having a lower price. This was the popular view of why Southwest succeeded in the business press. All the copycats failed. They missed Southwest’s profit logic, which was “unlocking capacity.” How to have more flights in a day with “fewer” planes.
The real secret: Planes do not make money on the ground, so Southwest used to turn the planes around in 15 minutes. This precision meant more flights and lower fares as they did not need as many planes as others.
Michael O’Leary, the CEO of Ryanair made this very clear recounting the advice he received from Herb Kelleher (former CEO of Southwest). Quick turns and secondary airports. Ryanair is one of the rare airlines that have successfully copied the Southwest model. Also, unlike Southwest, Ryanair has stayed true to the model to this day.
4. Your business plan is only as good as your ability to execute. Most of the time it comes down to hiring the right people.
Under Herb Kelleher, Southwest had a unique culture where most of the employees were unionized. According to Herb Kelleher, the only thing they focused on in the hiring process was the right attitude. Everything else could be taught. This is why the entire gate team was focused on turning the planes around in 15 minutes. If need be, pilots would check passengers in at the gate. Try that with other airlines.
5. Every entry strategy should have an exit strategy. The conditions that may make your business very profitable can change in a hurry. You need to be alert to this and be smart enough to exit when you are on top, not when you are losing money.
Many brick-and-mortar retailers shot to prominence with the profit logic of being a “category killer.” Circuit City, Toys “R” Us and, more recently, Bed Bath & Beyond are famous examples that were taught in business schools to illustrate this strategy.
However, this profit logic was upended by e-commerce, in particular successful e-commerce such as Amazon. The smart companies recognize this and plan for an exit strategy. This is why both Dish and DirecTV were looking for buyers in the mid-2000s as they saw the threat from streaming.
DirecTV was successful in getting AT&T as a buyer (one of the worst mistakes that AT&T made). Dish did not and its stock price is a shadow of its former self. However, unlike Bed Bath & Beyond, this was not because they did not recognize the threat. Similar situations are facing the cable companies now.