John Mullins and Randy Komisar. Getting to Plan B

 

The book Getting to Plan B: Breaking through to a better business model, written by John Mullins and Randy Komisar, contains several important lessons, primarily for start-up entrepreneurs, on developing successful business models. Though very repetitive around a few key ideas, the book is well worth reading especially for those who want to better understand how the business model is reflected in the different financial statements. with interesting examples from: Amazon, Apple, Celtel, Costco, Dow Jones & Company, eBay, GlobalGiving, GO airlines, Google, Oberoi Hotels, Pantaloon, Patagonia, Ryanair, Shanda, Silverglide, Skype, Southwest Airlines, Toyota, Walmart, Zara and ZoomSystems.

The book in three bullet points:

The business model concept is in the book defined as the pattern of economic activity comprising of five key elements that together determines the viability of any business. The five key elements being the revenue model, the gross margin model, the operating model, the working capital model and the investment model. Companies are successful when the five elements work together.

Getting to Plan B is about the process of discovering a business model that works, with the assumption that the initial plan is most often wrong. The discovering process can be made systematic by constantly formulating different hypothesis and measurements and continuously follow up and iterate the business model into a new Plan B.

The starting point for a new business model is to learn from successful examples worth mimicking in some way and examples to which you explicitly choose to do things differently, where the ultimate judge is the customers and the cash flow generated from your business model.

A brief summary of the different chapters:

1. Don't reinvent the wheel, make it better - the concepts of analogs (successful predecessors), antilogs (predecessors that you want to differ from), and Leaps of Faith (beliefs about answers with no evidence) is covered with the key take out to learn, mix and match to create your own business model, to experiment to test different hypothesis to prove or refute them.

2. Guiding your flight progress - the concept of dashboarding (a systematic way to guide experiments and track results) is presented with examples showing that measuring of specific parameters or results increases the focus of the company's activities, and that the dashboards, including parameters and goals, need to evolve over time based on the learnings they uncover.

3. Air, food and water - the chapter, focusing on revenue models, hits home two important points: the importance of resolving customer pain or providing customer delight, and the need for actual evidence of how customers are likely to respond. To develop a revenue model questions that need to be asked are: Who will buy? What will they buy? Why will they buy? How soon, how often, and how many will they buy? With what effort and cost on your part? At what price will they buy, and on what basis will they pay?

4. Avoiding rocks and hard places - the topic for the chapter is gross margin models; the spread between the price at which products and services are sold and the cost of selling those (COGS). The key messages with the chapter are that digital technology enables gross margin models in which COGS approaches zero, that a superior gross margin model creates leverage that can be applied differently depending on strategy, and finally the fact that pricing decisions should be value-based and not cost-based.

5. Trimming the fat - is a short chapter on operating costs; all the day-to-day costs that must be incurred in addition to COGS. Key ideas are that by doing things differently in relation to other actors in the industry, operating cost can be lowered or eliminated, and by starting the analysis at the most costly or scarcest resources in the industry areas for business model innovation might occur. Another key point is that adding costs might also enhance the customers' experiences and willingness to pay premium prices, so cost cutting is not always the answer to profitability.

6. Cash is king - is according to me one of the more important chapters in the book as the balance sheet, working capital and cash management is often forgotten in business model discussions. Different industries and business models requires different amount of working capital (the cash a company needs to keep the business running) and all elements in the business model have implications for the cash generated and the cash consumed. From page 139: "Failure to earn a profit won't put you out of business, as long as you still have cash. But if you run out of cash, even if you are profitable, you'll be gone in a heartbeat"

7. It takes money to make money - focus on the investment needed to get the business started and through the period until it can generate enough cash itself, and the general goal (there are exceptions) is to find a way to get to breakeven with as little investment as possible. The authors mention some of the many trade-offs involved with external funding from different sources, but primarily focus on venture capital. The conclusions are: Less investment means giving away less of the business, less credibility lost when leaving a business model for another, and fewer sleepless nights if you've mortgaged your house.

8. Can you balance a one-legged stool? - tries to summarize, at least on a conceptual level, the different elements of the authors' definition of a business model, and their implications on one another. The conclusion is that the revenue model, gross margin model and operating model directly affect the working capital model, and these four models directly affect the investment model.

9. Getting started on discovering your Plan B - ends the book where it started with a focus on the talented and visionary entrepreneur. In the beginning of the book there were statements such as "Intuitively, as is almost always the case for committed, passionate, entrepreneurs, they felt that the answers to all five questions were yes" (p29) and in the end "dreaming your entrepreneurial dream" (p214)...

A quick comparison with some other popular books on business models:

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengersby Osterwalder and Pigneur, atempts to introduce a standard language and format for analyzing and innovating business models based on the business model canvas. Getting to Plan B define the business model concept in financial terms and is not overlapping with this book. See my review here

Seizing the White Space: Business Model Innovation for Growth and Renewalby Mark W. Johnson, explores the circumstances when a new business model might be needed from an incumbent perspective, with several classic examples. See my review here

Open Business Models: How to Thrive in the New Innovation Landscape by Henry Chesbrough has a heavier focus on technological innovation in the context of business models and also covers the important area of Intellectual Property in relation to open business models.

The Ultimate Competitive Advantage: Secrets of Continually Developing a More Profitable Business Model by Mitchel, Coles, Golisano and Knutson, has a heavier focus on marketing with some ideas and questions relating to one-sided business models, so if you are looking to "sell more" perhaps you like this book. See my review here

The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits by Slywotzky, Morrison and Andelman, has a heavier focus on profitability and the changing areas in which high profit is possible to keep, it is a quick read. See my review here

All in all, the book is somewhat repetitive and rather long for the ideas it delivers, but with many interesting examples and important chapters on gross margins, operating costs and cash flow, it is well worth reading and a good complement to other books on business models not going into the financial details.

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Principles of Marketing. Unit 1 Setting the Stage. Chapter 1 Marketing and Customer Value. 1.3 Factors Comprising and Affecting the Marketing Environment

 

Figure 1.6 The Components of the Marketing Environment (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

LEARNING OUTCOMES

By the end of this section, you will be able to:

• 1 Define and describe the marketing environment.
• 2 Explain the components of the marketing environment.
• 3 Identify and describe the internal factors of the marketing environment.
• 4 List and describe the components of the micro- and macroenvironments.

The Marketing Environment Defined

Organizations don’t operate in a vacuum. They’re not self-contained, self-sufficient machines; rather, they are complex systems that require interaction with facets of both their internal and external environments in order to survive and prosper. In this section, we’re going to explore the internal and external factors that drive an organization’s marketing activities.

The marketing environment is comprised of both the external and internal factors and forces that influence an organization’s decision regarding its marketing activities. Some of these factors—internal factors— are within the control of the organization. Other factors—external factors—are outside the control of the organization. We’ll explore these in more depth below.

To illustrate this concept of internal and external factors and forces, think about your body as an organization. Your body is composed of several internal organs and systems, like your heart, lungs, and digestive system. These organs and systems function both independently and yet interdependently to keep your body going. The same is true with a business. The systems of the business are the people and departments that make up the internal organization (such as marketing, accounting, human resources, etc.). And just like the human body, these systems function independently and interdependently.

At the same time, your body is exposed to external influences, like expectations from your family and friends, cultural or gender stereotypes, and family responsibilities, that influence decision-making in either a positive or negative way. The same is true of the marketing activities of a business. They’re influenced by factors both from the macroenvironment and the microenvironment. Let’s take a closer look at these factors.

The Components of the Marketing Environment

As we’ll explore below, the internal environment is company-specific and includes the 5M framework and organizational culture. The external environment is subdivided into two components: the microenvironment (or task environment) and the macroenvironment (or broad environment), as illustrated in Figure 1.6

Components of the Internal Environment

The internal environment in marketing refers to those elements within the organization that define the atmosphere within the company’s structure. These factors include what’s known as the 5Ms of marketing and organizational culture.

The 5Ms of marketing (sometimes also called the 5M framework) is a marketing/management model that defines the elements of a marketing strategy that must be addressed in order to be successful. The five elements (sometimes known as the organization’s assets) include minds, minutes, machinery, materials, and money.19 Let’s take a closer look at each of these factors:

• Minds (Staffing): This “M” might well be considered the most important factor because it’s people who make sure the rest of the 5Ms are utilized in a productive manner to achieve the goals of the organization.20
• Minutes (Time): Time is another valuable asset. We’ve all heard the saying that time is money, and this is true within the marketing arena. For example, in formulating and implementing a new strategy, marketing needs to assess factors such as whether existing production processes are as efficient and effective as they can be, the length of time it takes the organization to introduce a new product to the market, and how responsive the organization is to competitive pressures.21
• Machinery (Equipment): Machinery consists of the equipment and/or physical assets used to process materials into finished or semifinished products.
• Materials (Production): Materials consist of the inputs needed to produce goods and services.
• Money (Finance): Perhaps second only to staffing, money is a very critical resource because it’s used to acquire and/or hire other resources.

Organizational culture is comprised of the shared values, attitudes, expectations, norms, and practices that guide the actions of all within the company. Think about organizational culture as “the way we do things around here,” and the culture can help or hinder an organization. For example, a good culture embodies positive traits that lead to improved performance and profit. On the other hand, a dysfunctional culture that’s toxic and/or inefficient can hinder even the most successful organization.22

For an example of a positive organizational culture, consider Zappos, where happiness is at the core. Founder Tony Hsieh wrote a book on the topic and has said, “We’re willing to give up short-term profits or revenue growth to make sure we have the best culture.”23 Hsieh was not afraid to put his money where his mouth was, either. In support of maintaining an outstanding company culture and a productive workforce, he instituted a policy that would pay new, unhappy employees $2,000 to quit following their four-week training period.24

By contrast, consider what a dysfunctional culture can do to an organization. During the summer of 2020, The Ellen DeGeneres Show was called out for having a toxic work environment. Eleven employees spoke out publicly about the negative organizational culture. There were allegations of sexual misconduct, intimidation, and racism.25 Ratings faltered as a result of the allegations, and DeGeneres ultimately decided to end her daytime talk show.

But how does organizational culture impact marketing? Here are three very tangible ways that your company’s culture can make a positive impact on marketing:

• Branding and marketing efforts emanate from the organization’s core values and culture and guide the organization’s marketing message. Therefore, if your marketing message doesn’t match the reality of the business, it’s akin to that old adage of “putting lipstick on a pig.”26 You’re talking the talk but not walking the walk.
• A strong culture strengthens your marketing message because it gives prospective customers a better idea of the values of your business, and customers who know what you believe and value are much more likely to do business with you. For example, research has demonstrated that 86 percent of buyers are willing to pay more for a positive customer service experience.27 Once again, think about the culture at Zappos. One of the ways in which the company has developed a strong following of loyal customers is through its policy that call-center employees are empowered to do “whatever it takes” to make the customer happy. Call-center employees don’t use scripts for calls, and there are literally no time limits on calls.28
• A strong organizational culture is also key in attracting and retaining employees. In his quest for a happier, more positive work environment, Hsieh implemented several policies at Zappos that he felt contributed to this environment, including a relaxed dress code, discounted food and drink, relaxation areas, and more.29 TOMS (featured in Companies with a Conscience later in this chapter) is another excellent example of this.

Components of the External Environment

There are two elements within the external marketing environment: the microenvironment and the macroenvironment. Although the factors within these environments are not directly within the marketer’s control, they still influence the decisions made by marketers. We’ll first examine the factors in the microenvironment, as shown in Figure 1.7.

Figure 1.7 Components of the Microenvironment (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

The microenvironment consists of five predominant factors.

• Suppliers. Suppliers (sometimes also called vendors) are those partners from whom we receive the parts and products necessary for our business. Let’s assume that your company produces microwave ovens. Some of your suppliers may be providers of transformers, the turntable, control panels, magnetrons, etc. As long as you have options in terms of the component suppliers, the bargaining power of each supplier is relatively weak. However, if two suppliers merge and decide to raise the price of the component the new entity supplies, that vendor now wields increased power.
• Market Intermediaries. Often, products are distributed by third-party sellers such as retailers, wholesalers, and others in the distribution channel. The reputation of these market intermediaries plays an important role in the marketing of the product or service, both positive and negative, so companies need to select and monitor market intermediaries on an ongoing basis. We’ll learn more about the roles of these intermediaries in Distribution: Delivering Customer Value, but let’s provide a couple of definitions and examples to help you better understand some of the parties in the distribution channel. Retailers (like Walmart or Target) purchase large quantities of goods from producers and then sell smaller quantities to end customers for personal use or consumption. Wholesalers purchase large quantities of products from producers and then sell to smaller businesses such as retail stores. A good example of a wholesaler is Gexpro, which sells electrical supplies for the construction industry.
• Customers. Understanding who your customers are will enable you to effectively reach them, whether online, locally in retail stores, or internationally.
• Competitors. Successful marketing strategies must be implemented after consideration of your competition. Knowing who your competition is and what they are and are not offering allows you to find the gap in the market. You want to be where the competition is not, at least in the sense of offering something unique to a targeted market.
• General Public. Because companies provide their offerings in communities that support them, they have an obligation to satisfy those communities. There’s an old saying that “perception is reality,” so marketers’ actions must be evaluated through the perceptual lens of those communities, because the public’s perception of you—your reputation—is essential to your success.30

Components of the Macroenvironment

Obviously, marketers can’t ignore what’s going on in the external environment. One of the tools used by companies to assess the environment in which they are operating is a PESTLE analysis. PESTLE is an acronym for political, economic, social, technological, legal, and environmental factors that provide marketers with a comprehensive view of the whole environment from multiple angles.31 These macroenvironment factors can be used to understand current external influences so that marketers can more easily identify what might change in the future, mitigate the identified risks, and take advantage of competitive opportunities (see Figure 1.8).

Figure 1.8 PESTLE Factors (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

Let’s look at these factors more closely:

• Political Factors. These factors include environmental and trade restrictions, political stability, and business policy. For example, Tesla announced in late 2021 that it is moving its headquarters out of California to Texas, following similar announcements by Hewlett Packard Enterprise (HPE) and Oracle, citing such things as lower housing costs and tax rates and fewer regulations, making it easier for companies to operate in Texas.
• Economic Factors. Economic factors play a huge role in terms of a company’s prospects in a market. For example, economic factors affect pricing and can even influence the supply/demand curve for a product or service. For example, high inflation causes consumers to have less spending power, which translates into lower sales and revenue. In 2022, consumers experienced both product shortages and higher prices, blamed largely on COVID-19, Russia’s war on Ukraine, and the availability of certain commodities, such as corn, sunflower oil, and wheat.32
• Social Factors. Social factors take in a wide swath of elements, such as cultural norms and expectations, health consciousness, population growth/decline, the age distribution of a population, and even career attitudes. Let’s take one of these factors—age distribution—and examine how it impacts marketing. Baby boomers (born between 1946 and 1964) comprise approximately a quarter of the US population. It’s largely as a result of this group’s aging and retirement that active adult communities such as Del Webb and others have sprung up across the nation.33
• Technological Factors. These factors encompass the innovations and developments in technology that impact an organization’s operations, as well as the rate of technological change. For example, look at one simple technological change with which we’ve all become comfortable in the public arena over the past decade or so: free WiFi. Starbucks was able to take advantage of this change and reposition its coffeehouses and differentiate itself from competitors by offering free WiFi.34
• Legal Factors. These factors include changes to legislation impacting employment, industry regulation, licenses and permits, and intellectual property.
• Environmental Factors. In the context of a PESTLE analysis, environmental factors refer to variables affecting the physical environment, like climate change, pollution, the scarcity of raw materials, and the growing concern over companies’ carbon footprints.

Knowledge Check

It’s time to check your knowledge on the concepts presented in this section. Refer to the Answer Key at the end of the book for feedback.

1.

The extent to which the supply chain adds value to our marketing strategy is best addressed by our evaluation of which of the 5Ms?

1. Materials
2. Money
3. Machinery
4. Minutes

2.

________ consist of third-party sellers such as retailers, wholesalers, and other resellers in the distribution channel.

1. Suppliers
2. Market intermediaries
3. Partners
4. Customers

3.

If you wanted to fill a gap in the marketplace, you would have to carefully consider ________ to see what is already available on the market.

1. the competition
2. the customers
3. the public
4. the resellers

4.

Which of the domains of the macroenvironment are most likely to be responsible for cutting-edge innovations?

1. Economic
2. Technological
3. Political and legal
4. Social and cultural

5.

You want to target a market more narrowly than simply using demographic data. You are also considering segmenting on people’s attitudes and interests. Which domain of the macroenvironment is most likely to be a relevant data source for your decision-making?

1. Economic factors
2. Natural factors
3. Political and legal factors
4. Social factors

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Principles of Marketing. Unit 1 Setting the Stage. Chapter 1 Marketing and Customer Value. 1.2 The Marketing Mix and the 4Ps of Marketing

 

Figure 1.4 The Marketing Mix and the 4Ps of Marketing (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

Marketing Mix Defined

Having a great product or service is just the first step in establishing a successful business or building a successful brand. The best product or service in the world won’t translate to profits unless people know about it. How do you reach customers and help them connect with your product? That’s the role of the marketing mix.

The marketing mix is commonly referred to as the tactics a company can use to promote its products or services in the market in order to influence consumers to buy. The marketing mix is also known as the 4Ps: product, price, place, and promotion (see Figure 1.4). Let’s look more closely.

• The product is the good or service that the company provides.
• The price is what the consumer pays in exchange for the product.
• The place is where the product is purchased.
• Promotion is comprised of advertising, sales, and other communication efforts the company utilizes to attract the customer.

The 4Ps of Marketing

To this point, we’ve been talking marketing in somewhat of an abstract manner. Instead of continuing with a theoretical discussion of the marketing mix and the 4Ps of marketing, we’re going to approach these topics using an example of a product you probably already own—a backpack. Let’s get started.

Product

Remember: product refers to a good or service that a company offers to its customers. Let’s consider a product that many of you likely own as a college student: a backpack (see Figure 1.5).

Figure 1.5 Marketing analyzes customer product needs to determine new product models or features that customers would value, such as a padded computer sleeve in a backpack for students. (credit: “Incase Backpacks” by albertoziveri/flickr, CC BY 2.0)

In terms of the first of the 4Ps, marketing analyzes the needs of consumers who buy backpacks and decides if they want more and/or different bags. For example, marketing will analyze what features consumers want in the bag. Do they want a water bottle pocket, padded shoulder straps, reflective tape, a padded laptop sleeve, or organizer pockets? Think about your own bag for a moment: Why did you buy this particular product? What features did it have that made it appealing to you?

Armed with market research knowledge, marketing then attempts to predict what types of backpacks different consumers will want and which of these consumers they will try to satisfy. For example, are you selling bags to adults for their children’s use? Are you selling them to young adults who might want more (or different) graphics on the bag? Are you selling to adults who will use these bags for work or for school?

Marketing will then estimate how many of these consumers will purchase backpacks over the next several years and how many bags they’ll likely purchase. Marketing will also estimate how many competitors will be producing backpacks, how many they’ll produce, and what types.

Price

Price is the amount consumers pay for a product or service. There’s a delicate balance here. On one hand, marketers must link the price to the product’s real or perceived benefits while at the same time taking into consideration factors like production costs, seasonal and distributor discounts, and pricing product lines and different models within the line.

Marketers attempt to estimate how much consumers are willing to pay for the backpack and—perhaps more importantly—if the company can make a profit selling at that price. Pricing products or services can be both an art and a science. In the case of our backpack example, the company wants to determine two things:

• What’s the minimum price that the company can charge for the backpack and still make a profit?
• What’s the maximum price that the company can charge for the backpack without losing customers?

The “correct” answer usually lies somewhere in between those points on the price continuum.

Promotion

Promotion includes advertising, public relations, and many other promotional strategies, including television and print advertisements, internet and social media advertising, and trade shows. A company’s promotional efforts must increase awareness of the product and articulate the reasons why customers should purchase their product. Remember: the goal of any promotional activity is to reach the “right” consumers at the right time and the right place.

In terms of our backpack example, marketing now needs to decide which kinds of promotional strategies should be used to tell potential customers about the company’s backpacks. For instance, should you use TV advertisements to make customers aware of the backpack? If so, you’ll want to run your commercials during programs that your target audience watches. For example, if you’re selling backpacks to children (or trying to entice them to badger their parents to purchase them), children’s cartoons may be the most cost-effective avenue to reach your target market. If your backpacks are designed for work or school, you’ll likely decide to advertise on television programs that target younger adults.

LINK TO LEARNING

Netflix, JanSport, and Stranger Things

A real-world promotional example is the recent brand partnership between Netflix and JanSport, the backpack company. These two companies collaborated on a Stranger Things–branded backpack with the launch of the fourth season of Stranger Things in 2022. This collaboration created five Hawkins-inspired backpacks centered on various Stranger Things themes. Read more about this promotion and see the backpacks here.

Perhaps you’ll decide to run magazine print ads. If so, you’ll need to decide in which magazines you’ll place the ads. Most magazines have a very specific readership demographic consisting of factors such as age, gender, and interests. If you’re going to advertise those backpacks with print ads, you’ll want to leverage readership demographics to ensure that your message is being seen by the right consumers—those who are most likely to buy your backpacks.18

What about internet advertising? Internet advertising (sometimes known as online advertising or digital advertising) is a promotional strategy in which the company utilizes the internet as a medium to deliver its marketing messages. If you’re going to go the digital route, what types of internet advertising will you use? Search engine marketing? Email marketing? Social media ads? TikTok videos?

Place

Place considerations focus on how and where to deliver the product to the consumer most likely to buy it. Where did you buy your backpack? Did you buy it in a big box store, online, in an office products store, or perhaps even the school bookstore? Once again, through market research, marketers determine where potential customers will be and how to get the company’s backpacks to them.

One important factor to note about the importance of place in the marketing mix is that it doesn’t refer to the location of the company itself but rather to the location of the customers or potential customers. Place deals with strategies the marketer can employ to get those backpacks from their present location—a warehouse, for example—to the location of the customers.

Knowledge Check

It’s time to check your knowledge on the concepts presented in this section. Refer to the Answer Key at the end of the book for feedback.

1.

Which of the following is NOT one of the 4Ps of marketing?

1. Product
2. Price
3. Place
4. Positioning

2.

Which of the 4Ps focuses on determining how much consumers would be willing to pay for a product or service?

1. Product
2. Price
3. Place
4. Promotion

3.

Which of the 4Ps of marketing focuses on how and where to deliver the product to the consumer most likely to buy it?

1. Product
2. Price
3. Place
4. Promotion

4.

DiJuan, a marketer for a soft drink company, ensures that his company’s products are available in numerous locations—vending machines, convenience stores, restaurants, and supermarkets. Which element of the 4Ps is DiJuan addressing?

1. Product
2. Price
3. Promotion
4. Place

5.

You’re a marketer trying to determine which trade shows you might want to include in your marketing mix. Which element of the marketing mix would address this concern?

1. Product
2. Price
3. Place
4. Promotion

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