Is ASSOB the answer?

We continue to work our way up the funding ladder, looking at the various options available to businesses to raise finance to fund growth. Having taken a closer look at crowd funding, grant funding and business angels now it’s the turn of ASSOB!

ASSOB stands for the Australian Small Scale Offerings Board.  Many people haven’t considered ASSOB as an option for raising capital but it has raised over $120m for over 200 companies and so should be a serious consideration for the right sort of company.

ASSOB is an unlisted securities platform, it is not a stock exchange like the ASX or NSX which shows live buy and sell offers although they do have a secondary sales functionality but given the lack of liquidity sales are relatively infrequent.

The process

You cannot list on ASSOB without using one of their accredited sponsors. The sponsor is responsible for holding your hand through the requirements of a listing as well as facilitating the preparation of an information memorandum which is the primary sales document used to raise capital.

Before listing on the ASSOB platform you have to seek approval from the listing committee and it’s not a foregone conclusion. They do consider quality start-ups but prefer established profitable companies. If you’re a start-up with no track record of revenue or profitability ASSOB isn’t really for you.

ASSOB operates under a class order from ASIC (02/273), this basically means that it is allowed to run a business matching service and facilitate the raising of up to $5 million from 20 ‘sophisticated’ or high net worth individuals in any 12 month period but without the onerous regulations of a full listing including disclosure statements.

In a way ASSOB is a form of crowd funding, where companies listed on the platform use their networks to find people to invest in their company. The main difference though is that you are limited to 20 investors in any 12 month period and they must be ‘sophisticated’ or ‘high net worth’ individuals, which, as you can imagine, significantly restricts your target market vs more traditional crowd funding.

When you list on ASSOB you have to become a public company and comply with the relevant Corporations Act legislation, most notably at least 3 directors and an annual audit to name a few. As a result of this ‘public’ company requirement ASSOB is a great staging ground before a listing on a recognised stock exchange such as ASX or NSX. So if you’re planning a move to a recognised stock exchange ASSOB is a good stepping stone.

Many companies list on ASSOB as a ‘compliance listing’, not to raise capital but to establish a channel for shareholders to buy and sell shares via the secondary sales platform. The secondary sales platform is not an established market, in other words it DOES NOT quote live share prices, all it does is quote asking prices and then leaves it up to a willing buyer and willing seller to negotiate.

Dispelling the ASSOB myth

ASSOB has a database of over 15,000 registered investors on its platform and many companies make the mistake of assuming that they will easily attract investment just by marketing to this database. This is NOT the case.

Many of these ‘investors’ are not active and you cannot rely on this database for your capital needs. You have to go out and market your company, much like crowd funding, but you cannot approach the public. Therefore you have to have a solid marketing and public relations campaign to act on.

This is a much more difficult process than crowd funding. With crowd funding you can approach anybody to promote your project. With ASSOB you are only allowed to approach sophisticated or high net worth individuals, i.e. you can’t just post something on your website stating you’re looking for capital, go and look at our ASSOB profile!

The other common mistake is to rely on the sponsor to bring the investors. Don’t get me wrong, some sponsors are very well connected and will give you access to more potential investors, BUT the sponsor’s primary role is to guide you through the ASSOB process and ensure you comply with the legislation.

This is the piece that many companies listing on ASSOB struggle with so make sure that if you are considering ASSOB as a means to raise capital you go into it with your eyes wide open.

Conclusion

Let’s conclude by summarising in terms of the key aspects of our funding ‘checklist’: 

  • Cost of funding – An ASSOB listing can cost anywhere from $8,000 upwards, $4,500 of this is ASSOB application and admission fees and the balance relates to sponsor fees although these can vary widely depending on the size and complexity of the company and what they are trying to achieve. Then there is the success fee, ASSOB take 1.5% (plus GST) of all funds raised and your sponsor will typically take anywhere between 5% and 7% of funds raised.
  • Ease of access – You will need to be approved by the listing committee prior to being included on the platform. ASSOB prefers more established companies with a track record but will look at start-ups as long as there is some kind of track record of revenue and profitability.
  • Speed – The process is typically not that quick. There are still a bunch of legal requirements that have to be complied with and this takes time. You’ll need to exercise some patience and expect at least a 6 month process.
  • Security – none, you’re looking for equity investors and so there should be no security requirements.
  • Consequences – The main consequence of an ASSOB listing is the corporate governance that you now have to comply with as a result of being a public company.
  • Size – The funding range is from $200,000 to $5 million although the average is around the $600,000 mark. 

Please feel free to contact Lattice Capital on info@latticecapital.com.au for advice regarding capital raising options in Australia.

Next week we’ll work our way a little further up the funding ladder and take a closer look at Venture Capital & Private Equity.

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Business Angels – on a wing and a prayer!

We are slowly working our way up the funding ladder, looking at the various options available to businesses to raise finance to fund growth. Having taken a closer look at crowd funding and grant funding now it’s the turn of Angel funding!

Business angels, like their celestial counterparts usually have superior expertise, networks, market access and investment capital. Accordingly they are well-placed to invest in high-risk, early-stage, ventures by taking a portion of their portfolio to provide emerging companies with seed and start-up capital. Their goal is to achieve significantly higher returns than from other asset classes. Best of all, from the entrepreneur’s perspective – “angels” contribute their time and experience, as well as offer introductions to valuable contacts.

You may have seen their kind in action on the BBC’s “Dragon’s Den” Unfortunately “benefaction” is not their primary objective!

Angel investors are often found among family and friends, so before searching further afield, make sure you have approached supportive family members …and any ‘rich uncles’ that maybe lurking! The capital provided by angel investors can be in the form of a once-off investment or, as more often is the case, by them providing ongoing financial and managerial support.

How do you find an angel investor?

If your family isn’t that well heeled, or well-connected, there is always the internet, where there are a large number of websites/platforms that focus on identifying and then, introducing suitable investors to would-be seekers of finance.

Whilst Australia has yet to develop a significant population with the risk appetite for angel or venture-capital investment, as exists for example in the US, the Australian Association of Angel Investors (AAAI) nevertheless estimates that in 2010 Australian angels invested >$1 billion in 5,000 early-stage businesses (source: AAAI website), a significant source of business funding by any measure.

Another option is to communicate with relevant industry specialists in State Government for useful referrals e.g. the Queensland Department of Employment, Economic Development Innovation.

Other avenues to try include:

How do angel groups work?

Angel groups pool their resources, expertise and money. An example would be the Brisbane or Sydney Angel’s groupings. In certain instances e.g. Sydney and Melbourne these groups have built up collective investment funds, called “side-car” funds – which comprise a pool of capital of approximately $10 million. Collective investment allows these groups to take on larger investments and increase their level of support and involvement for entrepreneurs (by enabling a deeper due diligence, greater awareness of industry risks and valuations and also business opportunities between groups nationally and internationally).

How much capital can be raised through Angel Investment?

Typical angel investment round’s raise between $350,000 – $400,000 (source: AAAI website) – depending on the investment case, although most companies have more than one investment round.

What do angel investors expect from you?

Before preparing your pitch – you will need to consider the following key issues – all of which need to be properly researched and presented:

  • Business plan
    • Have you developed a professional and comprehensive business plan that articulates your key business strategies, and which will stand up to the scrutiny of some of the harshest ‘judges’ you will encounter?
  • Market size
    • Are the projected revenues in your product category large …and growing?
    • Is this market… or can this market be worth several hundred million dollars?
  • Target customer
    • Do you have an identifiable niche and / or market segment?
    • Is there a demonstrable and significant demand for your proposed products or services?
  • Sales strategy
    • Do you have a plan for your products and services to achieve widespread market penetration?
    • How will you do this as efficiently as possible and if so will that strategy require the creation of an internal, direct sales team, or will you rely on external channel partners?
  • Competition
    • Do you understand the market and can you demonstrate that adequately – both in a local context as well as a global context?
    • Have you identified your potential competitors?
    • Do you understand what differentiates your products and/ or services?
    • Do you understand your positioning?
    • Are there sustainable (true) barriers to entry, which will help your company to maintain its competitive advantage/s?
  • Technology
    • Have you proved the concept, and the market demand, for your product or technology?
    • Can these factors be confirmed with independent data, or by objective experts or Universities / CRC’s that operate in your field?
    • Have you built a strategy and action plan to commercialise the technology?
  • Protected intellectual property
    • Have you taken professional advice on this highly specialised area of International law?
    • Have you protected key items of intellectual property?
    • Have you performed an exhaustive search to be sure that you are not infringing on patents or trademarks held by third parties?
  • Profit potential
    • Can you demonstrate how high margins (+15%) and consistent cash flow growth will be achieved?
  • Exit strategy
    • Do you have a clear exit strategy that will enable potential investors to generate a return of at least ten times (we said this was high risk / high return investment!) within the next five-six years?
  • Financial projections
    • Have you developed achievable and realistic/well-considered human resource and financial projections – which will at their most basic, outline all the key constraints and assumptions, as well as the illustrative income statement, cash flow and balance sheet?

Angel funding is not for the faint-hearted, its only viable for businesses and business owners where they have the required degree of knowledge and sophistication to provide the in-depth research and analysis expected, then implement a plan in accordance therewith.

War stories

There are always a few war stories around which can be quite useful to bear in mind when preparing your pitch! Included below are a few ‘irritations’ raised by business angels:

  • The worldwide market is $XXm and we only need to get Y% to achieve our projected turnover!
  • Start-up, no track history, no firm orders – projecting exit in Y5 of say 20x investment.
  • Management team expecting big salaries, without investing own money and offering little equity.
  • A well prepared plan let down by wholly unrealistic growth figures. It doesn’t look impressive, it just brings the credibility of the whole plan into question.
  • Valuations that don’t sufficiently recognise investor risk and value the opportunity almost as if realising it is a formality.

Questions typically asked of Angels with regards to people issues:

  • Can I get on with them?
  • Will they listen?
  • Will they take advice and act on it (small point but they want to spend my money)?
  • Do they have experience in the sector?
  • Do they look like they can run a business or are they really looking for a job?

Conclusion

Let’s conclude by summarising in terms of the key aspects of our funding ‘checklist’:

  • Cost of funding – angel investment usually requires giving up a significant stake, in exchange for the investor’s skills and capital. It is thus the most expensive funding, if your business is successful, however without it you may not have a business at all!
  • Ease of access – never easy to arrange …and only capable of being obtained after proper preparation of a suitable business plan, and presentation which may need to be pitched to many groups and/or individuals. The process can be time consuming and stressful for those that do not like the ‘interrogative’ style of some potential investors. Furthermore there is no guarantee of success, even in instances of a superb product/idea.
  • Speed – very variable, and entirely dependent on counter-parties – you may need some patience!
  • Security – none, unless a hybrid debt instrument is used to provide the return. Angel investors usually take-up equity and are thus risk co-investors, not debt financiers.
  • Consequences – You will be responsible for reporting back to your co-investors on a regular basis and also being held accountable for delivery in terms of the business plan.
  • Size – typically from $25,000 to $500,000.

Please feel free to contact Lattice Capital on info@latticecapital.com.au for advice regarding angel Investment, both locally (within Australia) and also from offshore.

Next week we’ll work our way a little further up the funding ladder and take a closer look at the Australian Small Scale Offerings Board (ASSOB), how it works and what is involved in an ASSOB listing!

Government Grant funding in Australia

Grant funding is often overlooked as a source of capital for small business in Australia. Admittedly there are few, if any, grants for starting a business, however there are grants and other assistance available for business activities such as expanding your business, research and development, innovation and exporting.

All of these activities can be very expensive and therefore any Government assistance available to mitigate these costs should be considered.

A grant can help with capital purchases, training, advertising and promotion. Many of these grants have a very niche focus though e.g. supporting indigenous Australians, growing primary production capacity, targeting export markets etc. But don’t give up hope as it’s pretty quick and easy to see if your business is able to apply for a grant.

Where to find them?

So where do you start? Well go and have a look on Google for Government Grants and you’ll find quite a few websites all offering to solve your funding issues by helping you identify and apply for grants relevant to your business sector and your needs.

The other option is to use the business.gov.au website, an Australia Government website which, at last count, had information on 620 grants across Australia. You can search for grants at a Federal or State/Territory level through this website.

The other option is to research your local council website to see what grants are offered for small business. Again, you are unlikely to find any that will fund start-up costs but you may find some financial assistance to support a training or marketing program you are undertaking.

How do they work?

Each grant is different, some are available once a year, others on a quarterly basis and some on an ongoing basis. You will need to look at each one to see when the next grant applications are assessed.

Some grants may also require a financial contribution from the business on a matching basis, i.e. we’ll give you $20,000 if you put in $20,000, which is all very well as long as you have a lazy $20,000 hanging around!

Commercialisation Australia (CA)

One of the most popular grant funding agencies in Australia is Commercialisation Australia, a Government initiative which is a competitive, merit-based assistance program offering funding and resources to accelerate the business building process for Australian companies, entrepreneurs, researchers and inventors. They have ~$280 million of funding available through to 2014 and ~$80 million per annum there after!

They have four broad grant categories

  1.  Skills & knowledge – up to $50,000 to access specialist advice and services. A 20% contribution is required from the participant. This grant can cover the cost of developing or reviewing a business plan; determining suitable corporate structures;  undertaking a risk analysis,; developing an investment proposal and pitch; and developing a capital plan to identify funding requirements amongst others.
  2. Experienced executives – up to $350,000 to engage a CEO or other experienced executive.  A 50% contribution is required from the participant. This grant can cover employment of an experienced Chief Executive Officer or other senior executive.
  3. Proof of concept  – $50,000 to $250,000 to prove the commercial viability of new IP. A 50% contribution is required from the participant. Proof of Concept assistance will fund the steps necessary to establish the commercial viability of a new product, process or service including costs in relation to Labour, Contracting , Plant, Prototyping and Intellectual property protection.
  4. Early stage commercialisation – $50,000 to $2 million to take a new product, service or process to market. A 50% contribution is required from the participant. Proof of Concept assistance will fund the steps necessary to establish the commercial viability of a new product, process or service including costs in relation to Labour, Contracting , Plant, Prototyping and Intellectual property protection.

So let’s conclude by looking at our funding checklist:

  • Cost of funding – grants are typically not repayable but may require a participant contribution of up to 50%.
  • Ease of obtaining – There is normally a strict set of application criteria that have to be met. Grant funding is limited can be a very competitive process.
  • Speed – This depends on the agency in control of the grant. As with any “red tape” things can drag on a bit so you need a good dose of patience!
  • Security – none, zilch, zippo
  • Consequences – You will be responsible for reporting back to the agency who provided the grant and showing them proof that the grant was spent in the manner originally anticipated.
  • Size of funding – this varies considerably from a few thousand up to $2 million.

So Grant funding is potentially a viable option for many small businesses in Australia to consider. It’s worth taking a bit of time and doing the research, you may be pleasantly surprised!

What grants have worked for you and which were a waste of time and effort? Please feel free to share and comment.

Contact Lattice Capital on info@latticecapital.com.au for more advice on accessing Government Grants.

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Crowd Funding – the NEW economy (Part 2)

crowd funding, raising capital, grants, fundsLast week we looked at Crowd Funding from a pledge or donation perspective, this week its the turn of Crowd Funding from an investment perspective.

I won’t go over what Crowd Funding is again, you can look at the last blog to get that information. What I will focus on now is Crowd Funding legislation for investment purposes and how it will fundamentally change the way small business raise capital in the next few months, or 2 years in Australia’s case.

Most people know (or should know) that you are not allowed to raise money from Tom, Dick or Harry unless you have registered a prospectus with ASIC or if you have managed to operate under another ASIC class order such as CO 02/273 which the Australian Small Scale offerings Board (ASSOB) uses, which allows companies to raise up to $5 million from up to 20 “sophisticated” investors in any 12 month period. This basically cuts out over 95% of the population from being able to participate in these investment opportunities.

Well, the above landscape is about to change in a big way, well in the US anyway, and hopefully sooner rather than later in Australia.

Barack Obama recently enacted his US Jobs Act to promote jobs growth in the US economy following the GFC. He recognised that to to do this the US Government needs to help small business as they are the back bone of the US economy (much like Australia). The biggest constraint for small business in the US is their ability to raise capital as credit policies are too restrictive meaning that the small business owner cannot easily access capital to grow his or her business (much like Australia – hmmm a common theme is occurring!).

As a result it was proposed to allow companies to use Crowd Funding as a means for businesses to raise up to $1 million from the “Crowd” where the maximum amount from any one individual will be capped at $10,000 per annum. Essentially meaning that you can stand on a street corner and promote the sale of shares in your business to everyone passing by without breaching the Corporations Act, PLEASE don’t try this now!

This bill passed through the House of Representatives with a huge amount of support (over 90%) and is now sitting in the US Senate awaiting approval. As you can imagine the Securities & Exchange Commission (the US equivalent of ASIC), are very concerned that investors (the man in the street) will be fleeced by unscrupulous business people promising spectacular returns in exchange for your trust, faith and oh yes your money! BUT as a number of supporters of Crowd Funding have pointed out, you can go to Las Vegas tomorrow and put $100,000 on RED and nobody will stop you, so why should somebody tell you not to risk $10,000 to buy shares in a business?

The implication for small business in the US is huge if the legislation is passed through the Senate, it will essentially free up the capital markets and give small business a “fair go” to raise capital from the crowd without the onerous paperwork or cost normally involved.

No doubt it will come with its problems including a fair share of unscrupulous business people trying to make a quick buck, but hopefully that will be the exception rather than the rule.

So what needs to change in Australia before similar legislation is considered? Well there are a few things to consider:

  • Cost – A cost-effective share transfer service, there’s no point being able to invest $10 in a company only to get an invoice for $20 to process the transaction.
  • The policy – ASIC won’t change the rules, their actions will be governed by the policy decisions made by the politicians and that does not happen quickly or easily in the current political environment.
  • Governance – What form of governance should a company that has “Crowd Funded” itself be adopting, can they remain a private company or do they have to convert into an unlisted public company?

My money is on at least a 2 year wait before anything similar is allowed in Australia. ASIC are already engaging with some of the existing crowd funding platforms but its early days and I’m pretty sure they won’t want to rush into something like this which can fundamentally change access to the capital markets in Australia.

In the UK and Netherlands there are already investment style crowd funding platforms up and running, notably Crowd Cube in the UK and Symbid in the Netherlands, and they’re doing well.

The point is that Crowd Funding is here, in one form or another, and it’s only a matter of time before it becomes a main stream form of funding for small business.

So what could this mean for your business? Do you think Crowd Funding is a viable source of finance for small business and would you consider using it?

Next week we’ll start working our way up the funding ladder and take a closer look at Grant funding in Australia, what’s available and how to go about getting it.

Contact Lattice Capital on info@latticecapital.com.au for more advice on raising capital.

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Crowd Funding – the NEW economy (Part 1)

raising capital, iPledg, “What on earth are you talking about!” tends to be the initial repsonse when you ask someone if they have heard of Crowd Funding, but it happens to be one of the fastest growing forms of eCommerce in the World. According to Gartner the Crowd Funding industry worldwide is expected to grow from a $1.2 billion industry in 2009 to almost $7 billion in 2013, that’s big!

So what is it and how can businesses use it to raise capital?

Essentially Crowd Funding is about using the “Crowd” to raise capital for your projects. A project creator will load their project onto one of the many and growing Crowd Funding platforms, set a funding target and timeframe and then use their social networks such as Facebook and Twitter to ask their family, friends and fans to make financial contributions towards their campaign, typically in exchange for a reward.

Many are skeptical, Why would you just give money away? Well if I told you that one site in the US was successfully funding  over $12 million in new projects every month would that change your mind?

Kickstarter, a US based Crowd Funding site was the front runner of modern day Crowd Funding. In the last 12 months they raised almost $100 million on over 27,000 projects without the project creators having to give away any equity in their business or having to repay any funds raised!

Admittedly they have more of a focus on creative type projects but that doesn’t mean it cannot be applied to more commercial purposes. One example was the creator of the Tik Tok watch strap.

An entrepreneur in the US wanted to make a watch strap whereby you could clip an iPod Nano into it and walk around with it on your wrist. He approached Apple and they said nobody would go for it. So he started a Crowd Funding project asking for $15,000 in 30 days to build a protoype. At the end of that month Apple were phoning him after he had raised almost $1 million from over 13,000 people. He is now selling his strap in every Apple store around the world!

So why was this project successful, well there are typically 3 reasons why someone would back a project:

  1. They know and like the person (family and friends);
  2. They have an emotional connection with the project , e.g. Save the Whales (fans); or
  3. They just want the rewards.

In the above case many people backed the project as in exchange for their pledge they received a cool reward, e.g. pledge $50 and you will receive one of the first protoypes with a retail value of $150, etc.

So as an entreprenuer or small business owner, Crowd Funding is certainly an option in relation to the funding of new product development for example, especially where you are able to offer creative and cool rewards in exchange for pledges.

There are very few Crowd Funding platforms in Australia at present but you should expect to see this form of funding grow as it gains traction. The one to look out for in Australia is iPledg, (that’s right, no e on the end) which is a relatively new platform but which is gathering traction quickly.

So lets conclude by looking at our checklist:

  • Cost of funding – anywhere between 5% and 10% typically but many Crowd Funding sites will only charge their fees if your project is successful, i.e. if you meet your funding target.
  • Ease of obtaining – Its easy to set up a project, typically the costs are negligible (anywhere between $0 and $250) but you are responsible for marketing the project to your social networks.
  • Speed – You have control over how many days you want your project to run for, typically anywhere from 30 days to 120 days.
  • Security – none, zilch, zippo
  • Consequences – You are responsible for making sure you deliver on the rewards you have promised.
  • Size of funding – the sweet spot seems to be around the $3,000 to $30,000 mark but, as you can see above, there are basically no limits to what can be achieved.

So who out there has used Crowd Funding and what was your experience? Let us know how easy or hard it was to use.

The good thing is at the moment it costs you nothing to try, i.e. if you don’t succeed the chances are no fees are payable.

The focus above has been on raising capital using Crowd Funding from a pledge perspective, next week we’ll take a look at using Crowd Funding from an investment perspective.

Contact Lattice Capital on info@latticecapital.com.au for more advice on raising capital.

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Business Finance – Climbing the Funding Ladder

Most of us have been there……You have a small business that wants to grow but you don’t know what form of funding is most appropriate given the size and maturity of your business, many questions typically spring to mind:

  • What is the cheapest form of funding?
  • Which funding is easiest to obtain?
  • Which funding is the quickest to obtain?
  • Which funding requires security and how much?
  • What are the potential consequences of obtaining certain funding?

Over the next few weeks we will be taking a close look at the funding ladder and what funding is available and appropriate for businesses of different sizes and at different stages of development.

We’ll use the funding ladder as a tool to help understand the different forms of funding and we’ll start right on the bottom rung.

raising capital, capital raising, crowd funding, venture capital, angel investors, private equity

The funding alternatives above don’t necessarily have to happen in that order of relevance or importance but this is typically the way these are viewed.

The funding options we will consider will include the following:

  • Crowd Funding – this relatively new area of e-commerce is one of the fastest growing industries and can be used for creative, charitable, community and commercial projects to raise project funding.
  • Grants – There are many local, state and federal grants available and we will look at some of the most popular.
  • Angel investors – How do they make their investment decisions, how many pitches are successful, what are the consequences of bringing on an Angel investor.
  • ASSOB – The Australian Small Scale Offerings Board, a great way of raising investment form sophisticated investors.
  • Venture Capital and Private Equity – what type of businesses are they looking for, what expertise can they bring to the table, what is their investment criteria?
  • Trade Finance – using your working capital more efficiently to better manage your cash flow.
  • Bank loans – what is more appropriate, overdraft or term loans and how do they work and what security is required?
  • ASX/NSX – the pinnacle of capital raising, listing your business on one of the stock exchanges in Australia and the impact this will have on your business in terms of more onerous corporate governance requirements and being in the spotlight.

So what funding options have you tried and what has worked or not worked and why? Over the next few weeks we’ll try and help you get some clarity around the above issues for your business.

Contact Lattice Capital on info@latticecapital.com.au for more advice on raising capital.

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Step by step guide to getting your business strategy in place for 2012

business strategy, strategy, swot analysisOver the last 5 weeks we have taken a brief look at some of the most common strategic planning tools available for you and your business.

It is surprising that as much as we have been criticised for our “over simplistic” approach to business strategy, from our discussions with a number of CEO’s and business advisors it is apparent that the vast majority, although aware of these tools, do not pro-actively use them in their business, in fact many do not undertake any formal strategic planning.

You’ll be surprised what you can learn about you and your business from following these simple steps. The most important point is to be truthful with your responses. The issues do not go away if you just ignore them.

In that regard you should consider involving an external facilitator with little or no knowledge of you and your business and who is independent and unbiased towards management. This will ensure that you get to the real issues in your business, and as uncomfortable and confrontational as those initial sessions may be it will be the best time and money you would have spent in a long time.

To re-cap, the five step process we recommended is as follows:

  • Vision and mission statements;
  • SWOT analysis;
  • Boston Matrix;
  • Porter’s Five Forces; and
  • PEST analysis.

The best time to start a strategic planning process is now!, it is not something that you should do once a year and then stick in your cupboard to gather dust.

Strategic planning is a dynamic process, one that should be re-visited regularly and where the assumptions supporting your plans should be challenged continuously.

If you have not undertaken or updated your strategic plans in the last 6 months YOU ARE MISSING SOMETHING!

For additional information or assistance on strategic planning visit us at http://www.latticecapital.com.au.

Next in our series on “The Business Circle of Life” is business finance where we will be taking a close look at the funding ladder and what funding is available and appropriate for businesses of different sizes and at different stages of development.

PEST – insights into the business environment and the forces that change it

You DON’T need to run because you think a small critter is about to attack…and ‘NO’ this article will not be detrimental to your health like the Black Plague (‘pestilence’) – from which the acronym was derived.

The real shock is this – last week I attended a networking session with 6 business leaders of small to medium sized enterprises, which included 2 professional firms. The topic of discussion was business planning and what each leader and his/her team did as part of their annual strategic planning process.

Of the 6 people surveyed – not one of their teams completed any formal review of their direct competitive environment prior to…or whilst doing their strategic planning …and, with the exception of one party, none converted their strategic plans into financial targets/budgets.

This is something we had an inkling of – but until those admissions… no direct evidence of!

The above is all the more surprising given there are so many factors in the broader-environment that affect the decisions of owner/managers. Interest rates, market liquidity, tax changes, new laws, tariffs and trade barriers, demographic and local-government policy changes, are but a few examples.

In the words of Charles Darwin: “in the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment”! Strong words …worth thinking about…

In order to understand…and then help our clients adapt to these types of factors we, like many others, use PEST analysis, as a strategic planning tool.

strategic planning, PESTEL, business strategyPEST (a mnemonic standing for Political, Economic, Social and Technological). Its a simple, effective framework for assessing the macro- and meso-environmental factors which drive the environment in which your business is operating.

Its specific focus is on factors:

  1. Completely out of your control (the “macro” factors); and
  2. Partially in your control …but only if your company works collaboratively with other market players.

In a world besotted with acronyms PEST has morphed into STEER / SLEPT / PESTEL / PRESTEL / STEEPL / STEEPLED which you might have heard of or used. The reason for these variants is the fast changing world around us and the growing importance of legal factors and regulation, environmental and ecological factors to a number of industries like chemicals, resources, forestry etc…as well as the increased focus on global business, governance and ethics.

Some of the different variants of PEST are:

  • PESTLE/PESTEL: Political, Economic, Sociological, Technological, Legal, Environmental.
  • PRESTEL: the above with the Regulatory aspect added
  • PESTLIED: Political, Economic, Social, Technological, Legal, International, Environmental, Demographic.
  • STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical.
  • SLEPT: Social, Legal, Economic, Political, Technological.

Each element of the mnemonic is used to brainstorm the characteristics of the market, country or region where you’re operating and, from that, draw conclusions as to the significant forces of change operating within that/those environment/s.

Making use of PEST

PEST is a simple, 3 or 4-stepped process:

  1. Brainstorm only the most relevant factors that apply to your industry (based on the most suitable mnemonic e.g. PRESTEL)…thinking about current circumstances and the medium term future.
  2. Many factors can appear in one or more categories (e.g. interest rates could form part of government monetary policy and also the economic category) …so simply decide where you think it best belongs…don’t stress overly about the classification.
  3. Identify the salient information that applies to each of those factors – then think about the implications of changes in those factors …and what each variation might mean to your business.
  4. Draw initial conclusions and never assume they’re complete…or that you’re spot-on!
  5. Carefully review market realities on an ongoing basis and make the best of the position your company finds itself in by utilising that knowledge and analysis in the strategic action setting processes…

Now its over to you …and please let us know whether this assisted your strategic planning process?

If you would like a high level checklist for issues to consider in a PEST analysis drop us a mail on info @ latticecapital.com.au.

For additional information or assistance on strategic planning visit us at www.latticecapital.com.au.

Join us next week when we’ll take you through a step by step guide for getting your business strategy in place for 2012.

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Porter’s Five Forces – Your route to competitive advantage

Sound more like an Alien invasion …or a Star Wars sequel?

Well, if 1979 was the year in which the sci-fi cult got a fix with block buster movie “Alien” then strategy fundi’s got their own fix when Harvard Business school guru (Michael Porter) created this framework for analysing industry profitability and competitive advantage.

Its’ also useful for understanding ‘market power’ and market dynamics.

strategy, strategic planning, Porter's 5 forcesThis powerful tool is grounded on the 5, micro-environmental, ‘forces’ operating close to a company – which affect its ability to serve customers and make a profit, namely:

Supplier power – can suppliers of raw materials, labour and expertise drive up the price of your inputs, and if so, how easily? The fewer alternatives you have the greater the power of your suppliers. Other factors to consider are: how easy is it to switch between suppliers, are their offerings really differentiated, will switching mean the loss of key product features, how strong is the distribution channel and can they cut you out through vertical integration? Also consider the power of employees and the impact of labour unions?

Customer power – how easy is it for your customers to get critical information, then ask for and demand discounts or lower pricing? How sensitive are they to pricing generally? How many customers do you have, are there concentrations of buying power (i.e. customers who you are overly reliant on for volumes or revenues?), what is the typical order size, have your customers got other options in terms of suppliers like you, and is your business dependant on one or more distribution channels?

Competitive rivalry – how competitive is/are the market/s you’re in?

The key is to assess who your competitors are, what they offer and how that is different to your own offering, how numerous they are, how well resourced and how well known they are? Furthermore are their customers loyal, and are there switching costs if their customers chose an alternative supplier? The likelihood is that the larger and more profitable the industry is – the more competition there is likely to be…!

The Threat/s of Substitution  – this force covers the likelihood of you getting ‘bumped’ in favour of another supplier because of the existence of products outside your industry’s typical product offering.  This factor should not be confused with your competitors’ (similar) products… as it focuses on products outside your direct market e.g. Nestle Iced Tea is not considered a substitute for Lipton’s Iced tea…but coconut water, vitamin water, iced-coffee and sparkling mineral water might be?

The Threat of New Entrants – the ease, and thus likelihood, that competitors can rush into the market because of the profits being made?

Said another way – what “barriers to entry” are there in your industry in terms of (1) economies of scale (2) capital requirements (3) ease and access to distribution channels (4) market experience or cost competitiveness (5) technology and Intellectual Property protection (6) the likelihood of ‘retaliation’ from those entrenched in the market and (7) the degree of legislation and / or government regulation, to keep competitors out? 

Porter considers the 5-Forces determine “competitive intensity” and the relative “attractiveness” of a market i.e. the profitability of the industry you’re in.

We regularly use 5-Forces to assess that and the qualitative elements of client businesses (provided they operate in one market where similar or closely related products are sold…otherwise more than one analysis maybe needed).

Using the framework:

  1. Consider each of the 5-Forces individually, and summarise the key factors, which emerge.
  2. Allocate a rudimentary weighting e.g. “A,B,C“ to indicate the scale of importance to each factor. Consider which way that force might operate.
  3. Assess various scenarios, and how such might change or impact your business and other market players.
  4. Consider how elements of that force might be leveraged for your business?

 Potential pitfalls:

  1. Many consider it not practicable to evaluate industry attractiveness without considering the resources that a firm can harness. A resource-based analysis should also be considered before reaching conclusions.
  2. Some criticism has been levelled at Porter’s assumptions and some commentators feel that there is an additional, 6th force which has been ignored, which variously includes “complementors”  (the rationale behind strategic alliances), Government (national and regional) and Pressure Groups. Think about those elements too.

Conclusion

“You can’t fatten the pig on market day” (John Howard) – reminds us that it requires careful preparation and execution to achieve success.

Understanding ‘who’s who in the zoo’ gives you a clearer picture of where the market power lies and properly used, 5-Forces will clarify your strategic options for:

  1. leveraging position/s of strength
  2. avoiding introducing new products/services (or building a business) in markets which aren’t likely to be profitable
  3. improving market position – where your position is relatively weak.

Like SWOT and the other models discussed, 5-Forces is not all encompassing and it should ideally form but one element of a ‘suite’ of strategic models.

Have you used porter’s 5 forces in your business and what insights did it provide you? More importantly what did you do about it?

For additional information or assistance on strategic planning visit us at www.latticecapital.com.au.

Join us next week when we’ll take a look at one more well known strategy tool in the armoury, PEST analysis.

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The ‘Boston’ Matrix – Prioritising opportunities in your business

Back in 1968, one of the world’s preeminent management consulting groups, Boston Consulting (“BCG”) designed a means for their large (read multi-national or multi-business) clients – to decide how to allocate cash amongst their portfolio of businesses or strategic business units.

They termed that approach the “growth-share matrix”  – although it’s often called the Boston Matrix.

strategic tools, strategic planning, business strategyUnderstanding the Matrix

Briefly speaking the Matrix categorizes investment / growth opportunities into four groups:

“Stars” (High Market Share / in a growing market) 

  • In this category you’re well-established, and growth will be enticing.
  • Your business maybe investing significantly to gain market share, but learning curve benefits will be reducing costs and hopefully providing an advantage versus the competition.
  • There should be some strong opportunities in this ‘quadrant’, and you should work hard to realize them.

“Cash Cows” (High Market Share / in mature or slow growing markets)

  • Again, you’re well-established, so it’s easy to get market attention and exploit market gaps.
  • The need for marketing and investment is lower. High market share ensures unit cost levels can be maintained below those of competitors and that generates positive cash flows.
  • However it is only worth expending limited cash/effort as market opportunities are limited.

“Question Marks” (Low Market Share / in a market of potential growth?)

  • These are the opportunities that are really tough to discern.
  • They aren’t generating much turnover because you don’t have a large market share. But, they are in high potential markets so the potential to make money maybe good?
  • ·         These opportunities can become Stars and eventual Cash Cows, BUT they could just as easily absorb the effort and $ invested with little return …if cost-reduction achievements don’t materialise as anticipated.

“Dogs” (Low Market Share / in mature or declining markets) 

  • The worst of all the combinations – your market presence is weak, so it’s going to take heaps of hard work to get noticed. You don’t enjoy the economies of scale of larger or better competitors, so it’s going to be difficult to make a profit.
  • Definitely not where you want to be…

Using the Matrix typically four different strategies emerge:

  1. Build: Make further investments (to retain Star status, or to turn a Question Mark into a Star).
  2. Hold: do nothing and maintain the status quo.
  3. Harvest: Reduce investment and maximize profits/cash flows from a Star or a Cash Cow)
  4. Divest: Lose Dogs, use that capital to invest in Stars / Question Marks.

“Elementary my dear Watson” may be the typical response to what has been outlined… however, the Boston Matrix needs to be used cautiously because:

  • there are practical problems around deciding what ‘high’ or low’ market share or market growth mean in different contexts;
  • the quadrants aren’t necessarily equal or dissected at, say the 50% market share;
  • its easy to make an incorrect classification;
  • the matrices’ key dimensions ignore human and organisational behaviour (NB: It is difficult to assess how the “Cash cows” will react if all their surplus cash is invested elsewhere – particularly given inter-company  jealousy is one of the hardest things to manage in larger groups!);
  • “Dogs” are readily misunderstood – only a few may need immediate divestment  or deletion. Others may need to be held for “political” (the brainchild of existing management) reasons, to provide a credible presence, to complete a product or service offering, for defensive reasons (to keep competition out) and others may even be capable of being turned around?
  • the tool is best suited to assessing discreet businesses or SBU’s – but the principles can be applied to a situation where a business has a number of different products;
  • frequently, the organisational constraint is not CASH (BCG’s original focus when designing the approach) but rather innovative capacity; and
  • importantly “stars” and “question marks” are often very management intensive.

Whether you are a company with a portfolio of businesses or a business with a portfolio of products the Boston Matrix can provide you with some useful insights into your business or product mix strategy and can guide you through your investment decisions.

Take some time and allocate your different businesses or products into similar categories as the matrix above and you may be surprised at the result.

Using a healthy measure of common sense …or an external sounding board or advisor will go a long way to achieving a workable result…

For additional information or assistance on strategic planning visit us at www.latticecapital.com.au.

Join us next week when we’ll show you how to use Porters 5 Forces within your business.

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