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Operational Analysis

Operational Analysis

The next part of the feasibility analysis is operational in nature.

Operational analysis regards the initial analysis of what operational aspects are required to carry on the business. This is essential for determining the feasibility of a business idea. An idea may have potential many aspects, but the operational aspects are not feasible. An operational plan provides a working outline of the numerous components that make up or affect the intended business operations.

Here you examine the process by which you would exchange value with customers. In reality the operation analysis regards the availability of resources to get started in and carry out the intended business idea. You should identify all of the actual resources (not just the cost of those resources) required to begin operations and those to carry out the business activity. In a later chapter we discuss preparing detailed financial projections. In these projections you will present your intended growth path and required resources at each stage of business development. Here your preliminary look should give you an idea of whether the resources required to startup and begin operations make the business plan feasible.

  • Example: Many industries have high costs of entry that keep individuals from entering the industry. The resources required to begin and to continue operations are more extensive than the availability of those resources. The best example of this is the airline industry. Purchasing planes has such a high capital cost and the availability of planes for purchase is so limited that it is difficult for new businesses to break into the market during times of airline profitability (e.g., high travel and low fuel costs).

Operational Resources

The primary resources you will want to examine are categorized as follows:

  • Location – Where will you locate in order to carry out your business operations?
    • Note: Your business idea may require that you have multiple or diverse locations. You may need to secure manufacturing at one location, while concentrating your sales effort at another. Some service industries may require extensive travel or locating personnel in diverse regains. In any event, you will have to examine what locational requirements exist to carry on operation and maintain access to customers. ReferenceForBusiness.com does an excellent job of outlining the Considerations for Location Analysis.
  • Manufacturing/Service Process Operations – What processes need to be in place to carry out operations?
    • Note: People undertake franchises to avoid developing operational plans. For example, a McDonald’s franchise will provide a plan for required personnel, the required equipment, cooking procedures, cleaning procedures, advertising material, hours of operation, etc., etc. You should examine up front the extent of resources required to set up operations. It could require professional services (such as legal or accounting help), construction, expert consultants (as industry experts), etc. Quora provides an interesting article concerning What is Required of Individuals Tasked with Setting Up Operations.
  • Raw Material – What physical resources will be consumed in carrying on your business
    • Note: Assessing the required raw material is greatest in manufacturing businesses, but exists in service businesses as well. Raw material includes anything that is consumed in carrying on the business. This could include anything from office supplies (office) to lumber (construction), depending on the nature of the business. SmartSheet.com does an incredible job of explaining Materials Requirements Planning for Operations, also known as MRP.
  • Equipment – What physical assets do you need in the daily operations of your business?
    • Note: Equipment is a concern for both service and manufacturing businesses. In the example above, starting an airline requires lots of equipment. Even in traditional service industries (Medicine, Consulting, Law, Accounting) there are lots of equipment costs associated with operations. SWJ Breilman is a company that specializes in operational planning. Take a look at the equipment planning services that they offer as an example of the type of thought and planning required.
  • Distribution Channels – How will you deliver your product or service to customers?
    • Note: Within a product-based business you will have to account for shipments of raw materials from suppliers as well as the shipment of goods to customers. Service businesses will have to account for the medium for providing the services. Some businesses require in-person services, while others can provide services through other means (such as the internet). In any event, product and services businesses will have to account for the channels by which it will offer to sell goods or services to its customers. Will this require sales agents, distributors, out-sourced service providers, etc. Investopedia does a good job of identifying the Characteristics and Types of Distribution Channel.

The above sections are just brief overviews of the type of operational analysis you should do in determining the feasibility of your business. You will examine the operational feasibility be comparing the anticipated availability of resources with the resource requirements that you identify in this section.

Operational Plan Overview

Planning business operations involves converting strategic goals into tactics and processes for carrying out activity. Specifically, the operations plan contains the physical activities that one must undertake (or arrange for others to undertake) in carrying out your business’ value proposition. It establishes a timeline for the implementation of the business strategy over a stated period of time, generally 1 – 5 years. The plan may include expected costs of operation for each element of the plan. These figures may be used to set a budget, to substantiate the need for debt or investor capital, or to otherwise construct financial projections.

The operations plan will vary depending upon the nature of the business. Our explanation below is broken into general service and product-based businesses. In a hybrid business (offering some combination of products and services) then the operational plan will be a mixture of these elements.

Elements of an Operational Plan

Developing an Operational Plan

The operational plan requires a great deal of anticipation about future business activities. Given that a business product or service may change or evolve over time, it is important to incorporate the potential outcome of effectively carrying out a proposed business strategy and achieved stated objectives and goals.

Below are proposed steps for developing an operational plan:

1. Develop a concept of business operation.

  • Describe your product/service.
  • Identify the key competitive practices and important players:
  • Key Hires, Suppliers, Intermediaries

2. Acquire Necessary Information

  • Obtain Facts from Research, Field Tests, Experts
  • Be Mathematical – Articulate in Formula, patterns, rules

3. Define the Challenges

  • Focus on Major Costs and Expenses
  • Present Achievement Milestones: (6 months, 12 months, 24 months)
  • Show where you will be and what you hope to achieve at that point.
  • Be realistic – Don’t just say you are going to be huge.

4. Build Plan

  • Organize Resources by Logical Functional Categories
  • Present Fact-based Format with Cost and Time Line
    • Ex. Costs
    • Ex. Turn (Turn-over) 20x per year.
  • Convey Tactical Methods (Lots of Math please)
  • Just addition/subtraction, multiplication, and percentages

Developing the Concept of Operations

Developing the concept of operations restates the strategic position of the business. It involves explaining your business model and how you intend to transmit value to the intended customer.

Acquire Necessary Information

Use the methods previously discussed (primary and secondary research) to acquire necessary information about your operations. This can be done by studying competitors or like industries. It especially involves communicating with your prospective suppliers, intermediaries, and buyers.

Define the Challenges

From your research, you should be able to identify the key challenges of hurdles for being successful in the industry. Every industry is unique in this way. For example, your industry may have difficult licensing requirements (professional services), regulations (medical or environmental), competition (established product industries), high barriers to entry (high capital costs to enter), etc. Understanding what barriers exist will allow you to more adequately plan to overcome these hurdles.

Operational Flow

The operational flow of the business firm is based upon all of the processes (both internally and externally) that must take place in order to create and deliver value to the customer. The operationally flow, much like the business model, can be summarized in model or canvass of the operational elements

Porter’s Value Chain

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Porter’s Value Chain was developed and introduced by Michael Porter in his 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance. It has become a primary tool for developing an operational strategy within a business unit. It breaks down the primary operational activity of the business into five distinct segments of the value chain.

Primary firm activities are those that relate to the known procedural activities that take a raw material or a service idea and create, transform, and transmit that value to the end customer. The primary activities of a firm within the value chain are as follows:

  • In-Bound Logistics – This section regards the processes relating to the supply of raw materials or inputs. What processes does the firm understand when acquiring, handling, storing, and transferring materials within the business?
  • Operations – Operations are the actual processes or undertakings that creates a product or service (processes) that has value to the customer. In a product-based business this would be the manufacturing or assembly process.
  • Outbound Logistics – Outbound logistics regards any of the processes necessary for transferring the product or delivering the service to the customer. It is most closely related to storing and distributing the product to the distributor or customer.
  • Marketing and Sales – This section accounts for the processes or activities employed to deliver information to potential clients. This section will contain the actual activities and individuals responsible for the processes outlined in the marketing plan.
  • Service – This section regards the processes you employ to support your product or service following the sale. In the value chain it serves to maintain the value for the customer.

The secondary or support activities serve to support the above-mentioned primary activities. The support activities of a firm within the value chain are as follows:

  • Organization of Firm Structure – This section regards how the firm is organized around the value creation process. It outlines the administrative processes and positions necessary to carry out operations. It generally includes the non-primary disciplines of business: Accounting, Finance, Management, Legal & Claims, etc.
  • Human Resources – This section involves the discovery, hiring, training, and managing the employment benefits of internal personnel. This section is particularly important in non-product-based businesses, such as consulting, accounting, legal, medical or other professional practices.
  • Technology Development – This section pertains to the technological processes necessary to support operations. It may involve information technology (communications) or technology that relates to the carrying out of a primary process. This will be a primary section for a technology-based service company.
  • Purchasing (Procurement or Acquisitions) – This section involves purchasing or otherwise acquiring the resources necessary to carry out the operations that create value. It can involve accessing information or databases in service industries or acquiring raw material or parts in product-based businesses.

Below is a list of additional elements of an operational plan.

Company Timeline

After developing the value chain of activity necessary to carry out your business function, you will need to apply these operations to a timeline. The timeline allows you to account for the increase in activity and additional activities that arise as the company grows larger. The timeline should allocate additional resources at key junctures in the growth cycle of the business. The rapid-growth objectives of the startup generally requires large percentage increases in resource allocation early in the life of the business.

Staffing Plan

Who is going to fulfill the given operational activity at any point in the business life? Here, you will need to account for the necessary hiring process and growth of the business team (partners or employees). This process should account for the necessary personnel to carry out all of the primary and secondary operational activities of the business. As the business develops it will require more personnel with more specified roles. You will need to account for the personnel and growth requirements at each stage of the business.

Budget

The budget is the final portion of the operations plan. The operational budget is of primary importance when later developing the business financials. Developing the budget can be a tedious process. You will need to ascribe some level of cost (generally a liberal assessment) to the individual functions of the operations plan. These costs, collectively, make up the total cost of operations and will be matched against the revenue producing functions in the financials. Again, as functions within the business become more specialized, you will become increasingly detailed in your budget development. The main elements of the plan will correspond to the main components of the income statement:

Cost of Goods Sold

  • Research and Development: This section includes projected dates for product release and assumptions about resources required for research.
  • Costs and supply of Raw Materials – Account for the needs and supply mechanisms for raw materials at various stages of the business life.
  • Manufacturing Process – What necessary changes must take place in the manufacturing process? As the business grows, many of the operational processes may become automated or more stream-lined. The fixed costs may rise sharply early in the automation process, while the variable cost of goods produced declines.

Marketing and Sales

  • What demand creation activities, including marketing programs, will the business undertake. What are the cost projections for these activities.
  • Include the cost of product fulfillment, including sales model and sales productivity assumptions. This may include installation costs, cost of sales force, and commission fees.
  • Logistics costs for distribution of product. This is any cost arising when transmitting the product from point the business to the customer. This may require warehousing and other shipping related costs.

Support Activities

  • Include costs for all administrative activities and personnel. This will often involve human capital and technological resources. How will you track and retrieve customer sales information and problem reports. What will be the cost for the additional personnel, technology, and record retention.

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