Business strategy

The dotcom bubble provided ample evidence that even the best laid plans can fail or be thwarted by changing technology and unpredictable competitive action. The question then becomes, "What takes the place of plans?". The answer is strategy.

Strategy isn't about trying to plan the future. It is about using concepts to achieve goals in situations of uncertainty and competition. Concepts are in the mind so they cannot easily be written down on a piece of paper. However, once the concepts are in place, strategies can be employed and orchestrated using very simple calculations. These are often described as "back of the envelope calculations".

Back of the envelope calculations are not inferior forms of planning. They represent top level understanding and control that deal with only the most important and critical aspects of a business situation. This is particularly applicable in highly complex areas of business where vast amounts of information, and a plethora of incomprehensible detail, can easily cloud the more important issues. With bottom up strategies – the essential approach in these conditions – back of the envelope calculations are vital for fast reacting control.

The main focal point, for back of the envelope calculations in e-business strategies, is critical mass. A business direction can be guided according to the ease of achieving critical mass: moving in directions where critical mass is most easily achievable and away from areas where it is not. Such a strategy can be controlled and monitored by means of a simple model that uses only three business metrics:

Total overheads (O)

Gross profit per sale (P)

Total sales costs (S)

The critical mass (number of customers or orders needed to break even) can then be calculated using the formula:

Critical mass = (O + S) divided by P

From this simple formula, it is easy to calculate the minimum number of customers or clients needed for a particular business opportunity to be viable. If this number seems achievable then the business opportunity is deemed worth pursuing. This obvious fact provides a means of choosing between various business options: the easier it is to achieve critical mass, the more likely the business is to succeed in being profitable. This allows a business to be steered through a route of development that offers the least chance of failure.

The value of this formula is that it can show where flexibility and adaptability are needed. It can be used to guide the company into more profitable business areas and take it out of hazardous situations. It will let you know when your overheads are too high; tell you when they have to be drastically reduced if a sticky patch or a discontinuity occurs. It will let you know if increased marketing or reduced prices are likely to improve results or whether it might be wisest to pull out of a situation altogether and move on to greener pastures.

In essence, this formula can be used to enable a company to be flexible, adaptive and fast reacting. If a more powerful competitor comes on the scene, it will tell you to move on. If an new opportunity arises it will provide a way of judging whether or not to take advantage of it.

Although this is described as a "back of the envelope" calculation, it is more usefully employed as the basis for a simple spreadsheet model. This will provide a simulation of the business as various consequences of adjusting the metrics are observed.

The three adjustable metrics are overheads, gross profit and sales costs. These can be constantly monitored and adjusted to suit current conditions. Gross profits and sales costs are easily adjustable, but, overheads can be more difficult to change. For this reason, a business infrastructure that requires the lowest possible overheads is preferred.

This provides an eleventh rule when deciding upon a suitable e-business opportunity:

11) The essential infrastructure required must be such as to entail very low overhead costs.

Having a low level of essential overheads does not rule out the possibility of strategic expansions in favourable conditions. However, it will facilitate rapid contraction in times of change or adversity.