Weekly Assignment

Chapter 9 Operations Plan and Product (or Service) Development Plan

Introduction

This chapter is divided into two parts. The first part of the chapter describes the operations section of a business plan, which focuses on how you will produce your product or service and run your business. This is an important section that should appear in every business plan. The second half of this chapter focuses on a topic that is singled out in some business plans and is not in others—the status of the development of a product or service. If you are developing a nonexistent product, such as Laura Udall did when she developed the ZUCA (backpack on rollers for kids), you’ll need to include a chapter that describes the design and development of the product. If you’re opening a more traditional business, such as a restaurant or a woman’s clothing boutique, then you don’t normally need a chapter on product design and development. In these instances, you can include product-relevant information in the operations section. For purposes of illustration, we’ll show both the operations plan and the product design and development plan for Prime Adult Fitness.

Both of the topics discussed in this chapter require you to strike a careful balance between adequately describing the topic and not going into too much detail. Your readers will want an overall sense of how the business will be run and how your product will be developed, but they generally will not be looking for detailed explanations. It is best to keep each section short and crisp. If you provide too much information, the reader may believe that you are too immersed in the details of running your business to see the bigger picture.

The most important rule of thumb for writing the operations section and the product design and development section of your business plan is to focus on the aspects of each of these areas that are either essential to the success of your business or that set you apart from your competitors. Routine topics should be dealt with lightly and quickly. For example, anyone reading the operations section of Laura Udall’s business plan for the ZUCA ( www.zuca.com ) would have wanted to know, in particular, how her product (backpack on rollers) was going to be manufactured, how they would be stored, how long they would held in inventory before they were sold, and how the products would be shipped to distributors, retailers, or consumers if they were sold through ZUCA’s Web site. These issues, due to their importance to ZUCA’s success, should have been discussed in sufficient detail. Less critical issues, such as the physical location of ZUCA’s office and warehouse and the type of insurance its needs, could have been dealt with more briefly and quickly. Obviously, the critical issues will vary from plan to plan. The important thing is to identify the critical operational and product development issues facing your business and devote the majority of your available space to discussing these issues.

Now, let’s look at the operations plan section of a business plan.

Operations Plan

The operations plan section of the business plan outlines how your business will be run and how your product or service will be produced. 1  The topics that are generally included are operating model and procedures, business location, facilities and equipment, and operations strategy and plans. Other topics may be included depending on the nature of the business.

The degree of importance that the reader of your plan will place on the operations plan varies dramatically by plan. For example, if you plan to open a sporting goods store and have a substantial amount of retail experience on your management team, your reader probably wouldn’t delve deeply into this part of your plan. The most important operational issues may be store location and layout, and your reader, because of the amount of retail experience on your team, may trust you to figure out the rest. In contrast, if you’re taking on the challenge of producing an entirely new product, the operations section may be pivotal, even if you have experienced product development people on your team. There is a vast difference between thinking up a new product idea and actually designing a business to manufacture, market, and sell it. Savvy readers know this and will be looking for convincing evidence that the product can actually be built and that the founders have a handle on the operational aspects of the business.

The first section of the operations plan focuses on the operating model and procedures. This section of Prime Adult Fitness’s business plan is shown in  Figure 9-1 .

Introduction

Prime Adult Fitness will operate a full-service fitness center for people 50 years old or older. The operating model and procedures for the center are explained in the following sections.

General Approach to Operations

Operating a fitness center for people 50 years and older is a unique situation. It requires a careful balance of not drawing undue attention to the age of the members while at the same time tailoring all the activities of the center for an older clientele. It also requires an extreme sensitivity to the needs of older members. Fitness centers that cater to older people have found that the upper end of the age range is normally well represented. As a result, our operation plans and procedures must fully anticipate providing services to members in their 70s, 80s, and even 90s.

The biggest challenge in operating a fitness center is to motivate people to join and make exercise a part of their daily or weekly routine. People will find many reasons to not exercise. As a result, the operations of the center will be geared to (1) providing an uplifting environment for the members, (2) providing high-quality classes and equipment, (3) encouraging people to socialize and make Prime Adult Fitness one of the centerpieces of their life, and (4) establishing a rapport between Prime Adult Fitness staff and employees and our members. Both backstage (behind the scenes) and front-stage (what the members see and experience) operational issues are critical.

Backstage (Behind-the-Scene Operations Activities)

· Staff Selection. The staff and employees will be carefully selected. Along with the skills they need to perform their job, staff members must be able to relate to older adults, their families, and guests in a professional, thoughtful, and caring manner.

· Operations Manual. An operations manual has been prepared to document and articulate the day-to-day operational procedures of the center.

· Exercise Classes and Programs. The exercise classes and programs will be the backbone of the center’s offerings. All the classes will have special names, such as “Sunrisers,” “Water Dynamics,” or “Bones in Motion.” This tactic helps members identify the classes and teachers.

· Exercise Machines. The exercise machines will be modern and up-to-date. Specific employees will be trained to maintain the machines.

· Member Motivation. One of the most important ingredients to our success will be to make our members feel safe, secure, and successful. Older exercises need to feel that the staff cares and will respond if they need assistance. Staff at all levels will be trained to offer this type of service and attention. In addition, gentle follow-up and encouragement is needed to keep people coming to a fitness center. The staff will be encouraged to remember the names of the participants in their classes and devise a system for letting people know they are missed when they miss a class or quit coming for a while. It is often the personal connection to teachers, classmates, and staff that keeps people motivated to come back to exercise.

· Employee Orientation. All employees will go through a three-hour orientation before they begin work, where they will become acquainted with the operations manual and the philosophy of the center.

· Employee Education. Staff members and teachers will routinely attend workshops and conferences to understand current trends in fitness, obtain certifications, and tap into other resources.

· Emergency Plans. Emergency action plans, policies, procedures, and rules have been established and are documented in the operations manual. All employees will be trained in the procedures. There will be no ambiguity or indecision when an emergency occurs. If a member is injured or needs medical attention, all employees will know the procedure to follow.

· Waivers. After a member finishes orientation (which is required for all new members), he or she will be asked to sign a waiver. The waiver acknowledges that the individual has gone through the orientation, understands the risks of exercise, has checked with a doctor about starting an exercise regime, and holds Prime Adult Fitness harmless if any type of medical problem occurs.

Front Stage (What the Members See and Experience)

· Member Tours. A prospective member will be provided a tour of the facility, and offered a free 10-day trial period to try the facilities and classes. (Facilities that use this approach normally experience an 80 to 85 percent conversion rate.)

· Orientation. After an individual decides to join, he or she will go through a 30-minute orientation before being allowed to start using the facility.

· Operating Hours. The center will be open from 6:30 AM. until 9:00 PM. Monday through Saturday and will be closed on Sundays.

· Staff Assistance. Fitness center staff will be available to teach members how to use the equipment and help them track their efforts.

· Fitness Classes and Programs. The fitness classes and programs will be offered at various times during the day. Most classes will run for either 30 or 60 minutes. Nontraditional classes will also be offered, such as outdoor “walking” classes where members will walk in groups through neighborhoods near the center.

· Workshops. Along with fitness classes, workshops on nutrition, increasing the quality of sleep, dance movements, and neurobics (brain exercises) will be provided.

· Family Swims. There will be two scheduled “family swims” per week where members can invite their families as guests to use the larger pool. Guests will not be permitted at other times during the week. Other fitness centers have found that establishing a “guest policy” alleviates potential conflicts regarding the use of facilities.

· Multipurpose Room Rental. The multipurpose rooms will be available for rent, by members only, for special occasions such as birthday parties and anniversary parties. Part of the reason for doing this is to make the center a central place in our member’s lives.

· Game Room. A well-stocked game room will be available for members to pay mind-stimulating games, such as Sudoku, and socially stimulating games, such as bridge.

· Monthly Newsletter. Members will receive a monthly newsletter.

Inventory

Because of the nature of its operations, Prime Adult Fitness will not be required to carry a significant amount of inventory.

Schedule of Classes and Management of Peak Times

To make maximum use of our proposed facility, the classes and programs will be scheduled throughout the day, to relieve congestion in the center at obvious peak times of the day, which are before and after work. Prime Adult Fitness anticipates that 50 percent of its clientele will be retirees. As a result, Prime Adult Fitness should not experience the early-morning and late-afternoon bottlenecks experienced by most fitness centers.

Figure 9-1 Operations Model and Procedures (Prime Adult Fitness Business Plan)

Operations Model and Procedure

The primary objective of this section is to show that you have a firm grasp on the operational details of launching and running your business. It is usually not necessary to include a step-by-step description of how the business will be run, but major items should be covered. As mentioned previously, in many instances the operations section of a business plan will not be carefully dissected, but in some instances, the information that’s included represents make-or-break issues for a firm. For example, a company such as InstyMeds ( www.instymeds.com ), which features vending machines that provide patients access to prescription medications instantly after they’re prescribed by a doctor in a hospital emergency room or an urgent care center, will ultimately be judged by whether its system works. If the machines are difficult to understand or operate, frequently run out of the most commonly prescribed medications, or have trouble processing insurance information (i.e., if you have insurance, the machine will ask for your insurance information and will only charge you your co-pay amount), the company will have no chance of being successful.

A useful way to illustrate how your business will be run is to first articulate your general approach to operations in terms of what’s most important and what the make-or-break issues are. You can then frame the discussion in terms of “backstage,” or behind-the-scene activities, and “front stage,” or what the customer sees and experiences. As an alternative, some business plans frame the discussion of their operations in the context of a “day in the life of a business.” The Prime Adult Fitness business plan, as shown in  Figure 9-1 , is framed using the backstage/front-stage metaphor.

Another useful way to illustrate how a product or service is produced is to include an operations flow diagram in your business plan. An operations flow diagram shows the key steps in the production of a product or the delivery of a service. Many manufacturing startups, in particular, include an operations flow diagram to illustrate the participants in their value chain. Often, the operations flow diagram also depicts how the company intends to improve the flow of activities in its operations compared to industry norms; for example, IKEA ( http://www.ikea.com ) is the Swedish furniture company known for its brightly colored furniture and its approach of requiring customers to assemble their furniture (in exchange for a lower price).  Figure 9-2  demonstrates IKEA’s operations flow. Traditional furniture manufacturers tend to complete more of the activities themselves, whereas IKEA has opted to outsource the manufacturer of its parts to contract manufacturers and outsource the assembly and delivery of its furniture to its customers. In IKEA’s case, its operations flow diagram paints a fairly clear picture of how the company operates.

Although the approaches explained previously help describe how a company’s operations work, issues usually need to be singled out and discussed in more detail in this section. Examples of issues that fall into this category include the following:

· An explanation of whether you’ll handle your own order fulfillment and shipping or outsource that function to a fulfillment and shipping specialist like Shipwire or Amazon Fulfillment

· An explanation of how inventory will be stored and how frequently it will be turned over, if applicable

· A description of the length and nature of your product or service’s production cycle (when do you pay for inputs?; how long does it take to produce the product?; when does the customer buy the product?; when do you get paid?)

· An explanation of where bottlenecks are likely to occur in your manufacturing process or service delivery and how these will be handled

· An explanation of how seasonal production loads will be handled without service disruption (normally accomplished by building up inventory and using part-time help during peak periods)

· An explanation of how your quality control will be managed

· An explanation of how your after-sale service, if applicable, will be handled

Figure 9-2 IKEA’s Operations Flow Diagram (IKEA only Performs Design, Ship and Warehouse, and Sale)

An example of how these issues come into play is provided by Oopsy Daisy ( www.oopsydaisy.com ), a company that makes murals and other high-quality artwork for children’s bedrooms and playrooms, schools, and hospitals. The company contracts with 140 independent artists for original designs and converts the designs into murals and similar artwork in its manufacturing facilities. Its artwork is then sold through channels set up and maintained by others including  Amazon.com , The Land of Nod catalog, Target stores, and a host of individually owned stores and boutiques. 2  Although Oopsy Daisy’s operations flow is well designed and easy to envision, it doesn’t tell the whole story. There are additional issues, represented in the bullet point shown previously, that are equally critical to its operations and its ultimate success, and should be explained, either through one of the general discussion formats described earlier or under a separate heading. For example, how long does it take to produce a mural or similar piece of art? Is each product hand made, or is the process automated? How long is the average piece of art held in inventory before it is sold? If an Oopsy Daisy product doesn’t sell in a store or boutique, can it be returned? If so, who pays for the shipping and what happens to the product then? How long does it take, on average, between when a product is shipped to a store or boutique and when Oopsy Daisy is paid? What happens if Oopsy Daisy increases its inventory for Christmas or another peak period, and its products don’t sell well? These are the types of operations-oriented questions that would immediately occur to a discerning reader of Oopsy Daisy’s business plan.

The next section of the operations plan deals with a business’s location. This portion of the Prime Adult Fitness business plan is shown in  Figure 9-3 .

Prime Adult Fitness is proposing to operate a single facility at 201 Oak Drive in Oviedo, Florida. This location is considered to be ideal for Prime Adult Fitness for the following reasons:

Advantages of Location

· Ideal Community. Oviedo has a higher percentage of older people and people with a higher income than national averages. Both of these metrics are important to support a full-service fitness center for people 50 years old and older.

· Suburb of Orlando. Oviedo is a suburb of Orlando. Although Oviedo’s population is only 35,000, it is part of a densely populated suburban area adjacent to a city. Prime Adult Fitness’s trade area, Seminole County, Florida (the county in which Oviedo is located), has approximately 88,500 people 50 years old or older. Oviedo, and its surrounding area, continues to grow, with new neighborhoods and more multifamily complexes, such as apartment building and townhouses, being built on a continual basis.

· Visibility and Parking. The Prime Adult Fitness location will be on a busy thoroughfare, with two lanes in each direction divided by a grassy medium. The road was widened in 2005, so no new road construction is anticipated in the immediate future. This fact was confirmed by the Oviedo City Engineer. Adequate access is provided into and out of the facility’s parking from Oak Street or from Blackstone Blvd. Blackstone Blvd. runs adjacent to the Prime Adult Fitness parking lot to the east.

· Proximity to Suppliers. Locating in an urban area provides the company easy access to suppliers.

· Proximity to University. Prime Adult Fitness will be 12 miles from the University of Central Florida, which is a large university. The proximity to the university provides the company access to a labor pool of young people who enjoy working in a fitness environment and have a passion for working with older people. Prime Adult Fitness plans to work with the university to arrange work-study internships for students.

Figure 9-3 Business Location (Prime Adult Fitness Business Plan)

Business Location

This section of your plan describes the geographic location of your business. In some instances, location is an extremely important issue, and in other instances, it isn’t. For example, one of the reasons Jeff Bezos located  Amazon.com  in Seattle is that Seattle is a major distribution hub for several large book publishers. By locating near these distribution facilities,  Amazon.com  has enjoyed a cost advantage that it wouldn’t have had otherwise.

There are several specific instances in which a business’s location is a critical factor in its capability to operate efficiently and effectively:

· Proximity to a qualified labor force

· Closeness to suppliers

· Access to transportation, such as a major airport or an interstate highway

· Access to international shipping alternatives, such as a major airport, a rail hub, and/or a seaport

· Proximity to customers with a profile conducive to a firm’s business, such as a high-income neighborhood for an upscale clothing boutique or a certain ethnic population for an ethic restaurant

· Access to favorable state and local tax rates

· Access to economic incentives for locating in a certain area, such as tax abatements and/or low-priced land or labor

· Proximity to a high-quality community, in terms of public education, recreational opportunities, health care, and the arts, to attract a high-quality workforce

On a more fine-grained level, for restaurants and retail businesses, the specific location within a mall or shopping center, or a certain side of a busy street, may make a dramatic difference. For example, restaurants that feature breakfast food, such as a doughnut shop or a coffee shop, typically want to be on the side of a street that has the heaviest amount of traffic in the mornings. A miscue in a strategic area like this could cost a firm a substantial amount of business.

You should describe the rationale for your location in this portion of your business plan. For example, as shown previously in its business plan in  Figure 9-3 , Prime Adult Fitness decided to locate in Oviedo, Florida (a suburb of Orlando) because it is an upper-income community in an area with a relative heavy concentration of people 50 years old and older—its target market. It would have made much less sense for Prime Adult Fitness to locate in an area with opposite demographic characteristics.

The next section of a startup’s operations plan focuses on its facilities and equipment. This section of Prime Adult’s business plan is shown in  Figure 9-4 .

How the Equipment and Programs Are Being Chosen

An overarching objective of Prime Adult Fitness is to manage a fitness facility that has programs, classes, and equipment specifically tailored for our target audience—people 50 years old and older. To accomplish that goal, the following steps have been completed and are currently under way to guide our selection of facilities, programs, and equipment.

· Visits to Other Fitness Centers. Although there is not another facility exactly like the one Prime Adult Fitness envisions, there are a number of fitness facilities (sponsored primarily by retirement communities and health care organizations) that have been built and equipped specifically with an older clientele in mind. A committee comprising two members of the Prime Adult Fitness management team, two general advisory board members, and two customer advisory board members visited six facilities to collect information and meet with their staffs. The committee also visited two all-purpose fitness facilities in the Orlando area and two in Jacksonville, Florida, which were gracious enough to provide tours and talk about their efforts to accommodate older patrons.

· Focus Groups. Prime Adult Fitness has conducted three focus groups with prospective members in Seminole county to solicit their input regarding facilities and equipment. Two more focus groups are scheduled.

· Attendance at Industry Trade Shows. The Prime Adult Fitness initial management team has attended three industry trade shows that display fitness equipment and program material.

· Advisory Boards. Both the Prime Adult Fitness General Advisory Board and the Customer Advisory Board have been actively involved in providing input on important topics.

Building and Future Growth

Prime Adult Fitness has identified a 21,600 square foot, two-story facility (201 Oak Drive, Oviedo, Florida) that is available for lease. The company has signed an option to lease the property for seven years, pending funding, with an option to buy the property at the end of the seven-year lease. The facility was built by a real estate investment trust in 1998 and was leased to a major fitness chain, which occupied the facility and used it as a fitness center until the chain retrenched and closed all of its fitness centers in the Southeast United States. For purpose of comparison, the average Bally Total Fitness or Gold’s Gym is in the 30,000 square foot range.

Prime Adult Fitness is projecting 2,100 membership units by the end of 2014 (first year of operation), 2,226 by the end of 2015, 2,360 by the end of 2016, and 2,502 by the end of 2017. A membership unit is a single or a couple’s account. We believe that approximately 70% of our membership units will be single members and 30% will own a couples membership. As a result, 2,502 membership units translates into approximately 3,250 people using the facility. The building’s capacity is 3,500. Once the total number of people using the building approaches 3,500, a new facility will be opened to tap a new trade area. The building will take some retrofitting to suite Prime Adult Fitness’s needs. The process to complete this work and the costs involved are discussed in a later part of the plan. The building, after the retrofitting is complete, will feature the following:

· A four-lane fitness pool (83 degrees)

· A therapy pool (93 degrees)

· A general exercise room that includes the fitness equipment

· Four rooms for exercise classes and programs

· One multipurpose room

· A game room

· Men’s and women’s locker rooms

· A reception area designed to encourage people to gather and linger

· A suite specially equipped for massage and physical therapy

· A kitchen

· A coffee and juice bar

· A small movie theater

· Office space for the staff

· Three small janitorial rooms

· A mechanical service area (i.e., water heater, furnace, etc.)

· Guest restrooms

Equipment

Prime Adult Fitness is in the process of selecting fitness equipment that will facilitate the specific needs of our clientele. Generally, lower-intensity equipment will be chosen than that offered by a traditional fitness center, and weights and resistance equipment specifically designed for older people will be obtained. The selection of the specific equipment is a work in progress. A committee comprising Sarah Peterson (COO), Jim Campbell (program manager), Dr. Kenneth Jamison (director and family practice physician), and Dr. Jason Steele (advisory board member and sports medicine specialist) is in the process of researching options and will make a formal recommendation to the Prime Adult Fitness management team and board.

Government Codes and Regulations

A committee comprising Elizabeth Sims (CFO), Sarah Peterson (COO), and Martha Ford (advisory board member) has investigated and determined the government codes and regulations that Prime Adult Fitness must comply with if it occupies the Oak Drive facility. The committee has also been in regular contact with the city of Oviedo and Seminole county, Florida, to anticipate all zoning, parking, and neighbored impact issues that will be associated with opening the center. There are no issues that are anticipated to be of concern.

Figure 9-4 Facilities and Equipment (Prime Adult Fitness Business Plan)

Facilities and Equipment

This section describes a firm’s facilities and equipment. You should list your most important facilities and equipment and briefly describe how they will be (or have been) acquired, in terms of whether they will be purchased, leased, or acquired through some other means. If you will be producing your own product, you should describe the production facility that you have or are looking for. This is a particularly important consideration for a business-to-business startup, especially if you are an original equipment manufacturer (OEM). An OEM is a company that sells parts to other companies that use the parts in products they sell. Most manufacturers are very discerning about the OEMs they do business with and regularly visit and inspect their facilities. As a result, if you are an OEM and plan to maintain your own production facilities, you will need to convince the reader of your plan that your facility (or the one you hope to acquire) will pass muster with discerning customers.

If you will be producing a product and will contract or outsource your production, you should comment on the facilities of your business partners. If the contracting or outsourcing will be done in a foreign country, you should explain how you located your contracting or outsource partner and how you know that its facilities are suitable for your purposes. You may also want to comment on the degree to which you will hold your foreign partners accountable for the working conditions in their factories and for their environmental standards.

If your facilities are nondescript, such as generic workspace for computer programmers, a lot of explanation is not required. If your business plan is for a restaurant or retail store, and you already have a facility, it may be helpful to include a floor plan and interior and exterior photos. If you’re still in the process of locating a facility, or plan to build, a tentative floor plan and an artist’s or architect’s rendition of the facility you want to have is appropriate. If your facility is subject to any distinct zoning or OSHA regulations, or you will need special permits to operate, those should be disclosed. In terms of equipment, you should comment on any especially critical or expensive equipment you will require.

If your business is projecting fairly rapid growth, you should comment on how you’ll be able to grow within your existing facilities or how you plan to transition from your existing facility to a larger one. You don’t necessarily have to have all the answers at this point. It’s important, however, to show your reader that you’re aware of this issue and that it’s part of your ongoing planning process.

The next section of your operations plan focuses on operations strategy and plans. This section of Prime Adult’s business plan is shown in  Figure 9-5 .

Relationship between Business Strategy and Operations Strategy

The Prime Adult Fitness business strategy and competitive advantage hinge on two things:

(1) meeting the needs of our 50+-year-old clientele in a manner that is specifically tailored to them and (2) reaching our annual membership goals through new members and member retention. Our operations strategy, described previously, is specifically geared to meeting these objectives, and will be updated on an ongoing basis. Our overarching objective is to fully understand the needs of our clientele and to serve them in an efficient and caring manner.

In-House vs. Contract Activities

To maintain consistency for our members, full-time and part-time employees will conduct the vast majority of our operations. Contract employees will be used occasionally to teach specialized classes. There are two exceptions to this general rule:

· Massage Service. A massage service will be offered in our facility on a fee basis. The service will be offered by a local massage company, which is fully certified and has been carefully selected. Prime Adult Fitness will receive lead generation income representing a percentage of the fees collected.

· Physical Therapy. A physical therapy service will also be offered and will be staffed by personnel from an Orlando area hospital. Prime Adult Fitness will receive a lead generation income representing a percentage of the fees collected.

Figure 9-5 Operations Strategy and Plans (Prime Adult Fitness Business Plan)

Operations Strategy and Plans

This section deals with strategic and longer-term issues pertaining to your operations strategy. An important issue that is normally covered is the portion of your production process (or service delivery process) that you’ll perform in-house as opposed to the activities that will be done by others. You may want to refer to your operations flow diagram to explain the choices you’ve made or plan to make. The model that many firms use in constructing their operations flow (or supply chain) is to perform the activities in-house that they are particularly good at and find partners to do the rest. Although this approach sounds simple, the task of actually finding reliable partners and managing the operations flow can be complex. As a result, if you will rely heavily on partners to help you produce your product or deliver your service, you should provide an explanation of how the entire process will work.

An example of how complex and managerially taxing selecting partners and managing an operations flow or supply chain can be is provided in the Business Plan Insights box. The feature focuses on Patagonia ( http://www.patagonia.com ), a company that sells rugged clothing and gear to mountain climbers, skiers, and other extreme-sport enthusiasts.

Business Plan Insight Outsourcing the Manufacturing of a Product: A Practice That Requires More Work Than You Might Think

Many startups that plan to produce a product indicate in their business plan that the actual production of the product will be “outsourced” or produced by a contract manufacturer. Although this approach sounds good and is often successfully implemented, it requires more work and explaining than you might think. Often, companies are not able to find a partner that can build its entire product. In these instances, several outsource partners or contract manufacturers must be located, and the company must coordinate the work among its partners. In addition, in most cases, the production of a company’s product isn’t simply handed over to another company with no further work involved. A company must constantly monitor the quality of goods it is receiving from its outside partners and must interact with its partners on a continual basis.

An illustration of the amount of work that’s involved with managing two or more contract manufacturers is provided by Patagonia ( http://www.patagonia.com ), a company that sells clothing to extreme sports enthusiasts. Patagonia has never owned a fabric mill or a sewing shop. Instead, to make a ski jacket, for example, it buys fabric from a mill, buys zippers and facings from other manufacturers, and then hires a sewing shop to complete the garment. To meet its own environmental standards and ensure product quality, it works closely with each partner to make sure the jacket meets its rigid standards.

As a result of these standards, Patagonia does as much business as it can with as few partners as possible and chooses its relationships carefully. Once a relationship is established, Patagonia doesn’t leave adherence to its principles to chance. Its production department monitors its partners on a consistent basis. Although Patagonia avoids the work of actually producing its products, a substantial amount of work is involved in managing those that do.

Another operational issue with strategic implications is the extent to which a firm’s operations are clearly supportive of its business strategy. For example, if you plan to sell a high-quality product, then your approach to operations should reflect that in everything you do (i.e., partner selection, manufacturing process, customer service, quality control). It may be helpful to include a sentence or two in this part of your plan that clearly makes the link between your business strategy and your operations strategy. For example, Silpada Designs ( http://www.silpada.com ), a company that sells high-end jewelry through in-home parties, emphasizes quality in the products it sells. Its products are crafted by skilled artisans and made from the finest .925 percent Sterling Silver and semiprecious composites and human-made materials available. Most of its designs are proprietary or exclusive to Silpada Designs. The company offers its clients a 60-day exchange and refund policy and a lifetime guarantee to protect against manufacturer defect. This level of diligence and commitment to customer satisfaction is an example of how a company backs up its business strategy (i.e., high quality) with an appropriate operational response (i.e., skilled artisans, high-quality materials, and a lifetime guarantee). 3

Product (or Service) Development Plan

As indicated at the outset of this chapter, if you are developing a completely new product or service, you need to include a section in your business plan that focuses on the status of your development efforts. Many seemingly promising startups never get off the ground because their product development efforts stall or the actual development of a product or service turns out to be more difficult than anticipated. In addition, in many cases, building a working prototype of a product is not enough. A startup must also have a credible plan for ramping up the production of a product to satisfy the sales estimates in its financial projections.

This section of your business plan has four parts: development status and tasks, challenges and risks, costs, and intellectual property. The portion of the Prime Adult Fitness business plan that focuses on development status and tasks is shown in  Figure 9-6 .

Timeline

If funding is obtained, Prime Adult Fitness will open at 201 Oak Drive in Oviedo, Florida, on January 1, 2014. The following milestones have been completed and remain to be completed to open the center.

Completed Milestones

November—December, 2012	• Completed feasibility analysis
January, 2013	• Incorporated business
	• Selected board of directors and advisory boards
	• Applied for trademarks and copyrights
February—March, 2013	• Signed seven-year lease on building (subject to funding)
	• Hired architect to plan building retrofitting
	• Hired, by two founders, three other members of initial management team
	• Conducted a series of focus groups, visits to other fitness centers, and special meetings of the advisory boards to plan the retrofitting of the building, begin selecting fitness equipment, and start planning the initial classes for the center
Milestones to Be Completed
April—June, 2013	• Obtain commitment for funding
	• Begin retrofitting of building when funding is obtained
July—October, 2013	• Supervise retrofitting of building
	• Make final decisions on fitness equipment, complete planning of initial classes and programs
November—December, 2013	• Begin hiring and training staff and employees to open business
	• Ramp up marketing and public relations initiatives
	• Begin offering “pilot” exercise classes to solicit feedback
	• Host three open houses
January 1, 2014*	• Have grand opening and begin operations

Retrofitting of Building

The 21,600 square foot building Prime Adult Fitness will occupy will require approximately $1 million of retrofitting to make suitable for the company’s purposes. Prime Adult Fitness will pay for 75 percent of the retrofitting, and the building owners will pay 25 percent. An architectural firm, experienced in designing facilities for older people, will provide plans for the retrofitting. The following special issues have been considered in drawing up plans to retrofit the facility:

· Maximum use of natural light through installing additional skylights and windows

· Reduction in noise throughout the facility through the installation of special noise reduction material

· An improvement of the ventilation system throughout the building so that the locker rooms can be warmer than the exercise areas

· Resurfacing of the areas adjacent to the swimming pools with special material to alleviate concerns about slipping on the surface

· Installation of ramps for entering and exiting both pools (to accommodate people who have trouble navigating stairs to walk into the pool on an even surface)

· Installation of special assistance locker room space in both the men’s and women’s locker rooms to accommodate physical therapy patients (who may need assistance dressing before and after pool treatments)

· Installation of additional grab bars throughout the facility

· Updating the color schemes and general décor of the facility

· Installation of updated information systems

Figure 9-6 Development Status and Tasks (Prime Adult Fitness Business Plan)

Development Status and Tasks

The purpose of this section is to describe the present state of the development of your product or service. Most products follow a logical path of development that includes product conception, prototyping, initial production, and full production. Depending on the sophistication of your product development or service development process, products and services typically pass tests that probe their performance and technical merits as they pass from one step in the development process to the next. You should explain the process you’ll follow to move your product from one stage to the next.

You should describe specifically the point that your product or service is at and provide a timeline that describes the remaining steps. Prime Adult Fitness, as shown in  Figure 9-6 , framed its timeline in the context of milestones. You should also describe how the process of completing the development of your product or service will unfold, in terms of the steps that need to be completed and the people who will be involved. Many startups, for example, involve prospective customers in testing early versions of their products and services to obtain feedback. If these types of tests have already been conducted, you should briefly comment on the process you’ve used and your results to date.

If you are a very early-stage firm and only have an idea, you should carefully explain how a prototype of your product will be made. A prototype is the first physical depiction of a new product. For a new product, such as ZUCA’s backpack on rollers or InstyMeds’s prescription dispensing vending machines, a prototype is needed to test the merits of the product and get substantive feedback from others. 4  For example, regardless of how good InstyMeds’s concept looked on paper, the only way for the founders of the company to ensure themselves and others that the system worked was to build one or more prototypes of the vending machines and test them under various conditions. It’s one thing for a company such as InstyMeds to say that its vending machines will authenticate prescriptions, verify insurance information, accept payment, and reliably dispense prescription medication. It’s another thing to show convincing evidence that patients have used prototypes of the machines without a single failure in terms of the functionality of the machines and their ability to keep the most commonly prescribed medications in stock.

For a company like Prime Adult Fitness, which will not produce a physical product, a prototype can take the form of a “sample daily schedule” of the fitness center’s activities and a booklet that provides illustrations of what the exterior and interior of the center will look like. Short descriptions of the classes that will be offered and the programs that will be available, along with short bios of some of the instructors, are also helpful. If this information can be put together in a tight, attractive package, it can serve the role of a prototype and can be distributed to people for feedback.

There are many ways to get a product prototype made if the process requires specialized equipment or expertise. For example, ThomasNet ( www.thomasnet.com ), a directory of U.S. manufacturers, has a listing of rapid prototyping services. Similarly, freelance job sites like Odesk ( www.odesk.com ) and Guru ( www.guru.com ) can help you locate independent contractors that are specialists in building prototypes utilizing 3-D printers and other means. In some instances, a virtual prototype, which is less expensive than a physical prototype, is sufficient. A virtual prototype is a computer-generated 3D image of an idea. It displays an invention as a 3D model that can be viewed from all sides and rotated 360 degrees.

If your product or service is beyond the prototype stage, explain the stage of development of your product. After a company has a working prototype of its product, usability testing often takes place. Usability testing is a form of product/service feasibility analysis, which measures a product’s ease of use and the user’s perception of the experience. Usability tests are sometimes called user tests, beta tests, or field trials, depending on the circumstances involved. Usability testing is particularly important for software and Web site design. Resources for conducting usability tests were provided in  Chapter 3 . Web sites like Odesk and Guru can also be used to identify freelancers who can assist you in setting up appropriate usability tests for your product or service.

As you write this section of your overall product or service development plan, be aware that there is typically a direct correlation between how far away you are from having an actual product or service that can be sold in quantity to how risky the reader of your plan will perceive your business to be. A helpful illustration of this point is made by Stanley Rich and David Gumpert, the authors of Business Plans That Win. 5  Rich and Gumpert place companies into four distinct categories, in terms of how ready their products or services are to being sold:

· Level 4: Going Concern.  In these companies, the product or service has not only been developed, but it is being produced and sold to customers who are satisfied.

· Level 3: Ready to Go.  Companies at this stage have completed development and engineering of their product or service (the product actually exists). It is ready to be introduced to the market and ready for aggressive marketing and sales efforts.

· Level 2: Almost There.  Companies at this stage have built a prototype, which works but isn’t ready for marketing and production because it still needs additional evaluation and engineering. It also needs additional input from prospective customers to verify user benefits.

· Level 1: A Great Idea, But . …  Companies have an idea for a product or service but haven’t moved beyond the idea stage. No prototype of the product exists.

According to Rich and Gumpert it’s tough for Level 1 companies to get funding, unless they have an exceptionally highly qualified management team (that can be depended on to develop the product) or a product or service idea that is an obvious winner. Because most startups do not meet either of these criteria, Rich and Gumpert urge companies to move beyond Level 1 and put some development work into their products or services before they present their business plans to investors or others. If they don’t, according to Rich and Gumpert’s logic, in most cases, the business will be seen as too risky to merit funding. This stipulation requires a startup to basically self-fund or bootstrap its early product development efforts. If your company fits this description, you should briefly mention how you have funded your product development efforts to date.

One nice touch that dresses up a business plan is to provide a picture of your product if it exists or an artist’s rendition of what the product (or service setting) will look like after it’s developed. It’s normally easier for readers to relate to a product (or service setting) that they have a good visual image of it.

The next section of your product or service design and development plan deals with the challenges and risks involved. The portion of the Prime Adult Fitness business plan is shown in  Figure 9-7 .

The following challenges and risks are associated with the design, maintenance, and use of Prime Adult Fitness’s facilities:

· Completion of Retrofitting. Any delay in completing the retrofitting of the building, according to the “milestones to be completed” schedule would severely impact the scheduled opening of the facility on January 1, 2014.

· Purchase and Installation of Fitness Equipment. The final decisions for purchasing and leasing fitness equipment are currently under way and will ramp up once funding is obtained. Any delays in the proper shipping and installation of equipment would severely impact the scheduled opening date.

· Exceeding Costs of Budgeted Items. The initial opening and staffing of the facility has been carefully budgeted, as shown in the financial section of this plan. Exceeding the budget would be problematic for the firm financially.

· Final Clearances from the City of Oviedo and Seminole County, Florida. Final clearances regarding city and county regulations pertaining to the opening of our facility cannot be completed until the building retrofitting initiative is complete.

Prime Adult Fitness is confident that the risks inherent in these four items have been minimized.

Figure 9-7 Challenges and Risks (Prime Adult Fitness Business Plan)

Challenges and Risks

This section should disclose any major anticipated design and development challenges (and risks) that will be involved in bringing your product or service to market. You should be very candid and transparent in identifying these issues for two reasons. First, your reader will anticipate that challenges and risks exist and will want to know what they are. Second, your reader will want to see evidence that you are aware of the risks and challenges that exist. The last thing you want to do is paint an overly rosy picture of how quickly and effortlessly your design and development process will unfold. Experienced readers know that product and service development is an inherently bumpy and challenging process and will want insight into the challenges and risks you anticipate with your particular offering. If you omit this section, gloss over it, or provide an overly optimistic outlook, the credibility of your business plan will be undermined.

You should discuss the possible effects the challenges and risks you disclose could have on the development of your product or service, the costs involved, and your timeline for bringing the product or service to market. You should also discuss how you plan to avoid or deal with the challenges and risks involved if they occur.

The next section of your product or service design and development plan deals with the costs involved. The corresponding section of the Prime Adult Fitness business plan is shown in  Figure 9-8 .

Design and Development Budget

The budget associated with the building and facilities, to bring Prime Adult Fitness to its opening date, is as follows:

Item	Cost
Retrofitting Building	$ 750,000
Exercise Equipment  *	$ 150,000
Office and Computer Equipment	$ 60,000
Furniture	$ 30,000
Sales and Marketing Materials	$ 40,000
Other	$ 15,000
Total	$ 1,045,000
* Special Note—Exercise Equipment
A total of $150,000 of exercise equipment will be obtained as follows:
Method Used to Obtain Equipment
Purchase	$ 50,000
Lease	$ 50,000
Financed by Vendors	$ 50,000

Figure 9-8 Costs (Prime Adult Fitness Business Plan)

Costs

This section should provide a budget for the remaining design and development work that needs to be done to bring your product or service to market. The budget should include the costs of labor, material, consulting fees, prototyping, usability testing, and so on. You will probably need to talk to experienced people in your industry to arrive at accurate estimates, particularly if you’re not far along in your design and development efforts.

In most cases, exceeding your design and development budget will be one of the risks disclosed in the challenges and risks section shown previously. You should discuss the impact that exceeding your budget could have on your startup’s overall cash flow and financial stability.

The last section of the product (or service) design and development portion of your business plan focuses on intellectual property. This portion of the Prime Adult Fitness business plan is shown in  Figure 9-9 .

Patents	Due to the nature of its operations, Prime Adult Fitness does not anticipate filing for any patents.
Trademarks	All of Prime Adult Fitness’s distinctive marks, including its name, its logo, and its tagline, have been trademarked. Its Internet domain name ( http://www.primeadultfitness.com ) has been obtained.
Copyrights	The company will routinely copyright appropriate material.
Trade Secrets	Prime Adult Fitness considers the following material to be trade secrets: operating manuals, employee orientation material, membership lists, prospects lists, business plan, results of membership surveys, and financial records. This material is not allowed to leave Prime Adult Fitness’s premises, nor is it allowed to be copied without the permission of an officer of the firm.

Figure 9-9 Intellectual Property (Prime Adult Fitness Business Plan)

Intellectual Property

This section should describe any patents, trademarks, copyrights, or trade secrets that you have secured or plan to secure relative to the products or services you are developing. If your startup is still an early-stage company, and you have not taken action on intellectual property issues yet, you should get legal advice so you can at a minimum discuss your plans in this area.

The four forms of intellectual property that should be discussed in this section are patents, trademarks, copyrights, and trade secrets. Intellectual property is any product of human intellect that is intangible but has value in the marketplace. It is called “intellectual” property because it is the product of human imagination, creativity, and inventiveness. Traditionally, businesses have thought of their physical assets, such as land, buildings, and equipment, as their most important assets. Increasingly, however, a company’s intellectual assets are the most valuable. Prime Adult Fitness’s intellectual assets and the forms of intellectual property protection used to secure them, are shown in its business plan in  Figure 9-9 .

Prime Adult Fitness has moved quickly to protect its intellectual assets, particularly its trademarks. It has also established a firm policy to protect its trade secrets. A trade secret is any formula, pattern, physical device, idea, process, or other information that provides the owners of the information with a competitive advantage in the marketplace. Trade secrets include customer lists, marketing plans, product formulas, financial forecasts, employee rosters, logs of sales calls, laboratory notebooks, operations manuals, and similar material. Unlike patents, trademarks, and copyrights, no single government agency regulates trade secret laws. Instead, trade secrets are governed by a patchwork of state laws. The federal Economic Espionage Act, passed in 1996, does criminalize the theft of trade secrets.

The key to protecting trade secrets is to keep them confidential and reveal them only on a need-to-know basis to employees within the firm. In general, information that is known to the public or that competitors can discover through legal means (like looking at a company’s Web site or picking up a brochure at a trade show) doesn’t qualify for trade secret protection. It is also prudent to safeguard information that you deem as a trade secret through simple commonsense means. For example, a company’s customer or membership list should be available only through a password-protected computer file and only to employees who have a legitimate reason to use it. 6

The primary rule of thumb for deciding if intellectual property should be protected is to determine whether it’s related to a firm’s competitive advantage. If it is, then legal protection should be pursued. Trademarks and copyrights can be obtained fairly inexpensively. Patents are expensive to obtain, which poses a challenge for many startups. The total cost of applying for a patent ranges from $5,000 to $50,000, depending on the nature of the patent. In addition, a patent must be applied for within one year of when a product or process is first offered for sale, put into public use, or is described in any printed publication (such as a concept statement) or the right to file a patent application for the product or process is forfeited. Thus, the decision regarding whether to spend the money to apply for a patent on a product or process must be made soon in the life of a new firm. One provision of the patent law that is particularly important for entrepreneurs is that the U.S. Patent and Trademark Office allows inventors to file a provisional application for a patent, pending the preparation and filing of a complete application. This part of the law grants “provisional rights” to an inventor for up to one year, pending the filing of a complete and final application. This provision of the law allows a startup to stake a claim to a particular invention for up to a year while it’s deciding whether to move forward with a complete patent application. As of October 2013, the fee for filing a provisional application for a patent was $65 to $260 depending on the size of the business. You usually need to employ an attorney, however, to help prepare the application.

One sticky point in business plans is to decide how much to reveal about a company’s potential intellectual property, knowing that the plan will be read by people who ultimately won’t be involved with the venture. Although a company wants the readers of its business plan to fully grasp its potential, the fear is that by revealing too much, a startup risks losing the confidential nature of its plans, particularly as it relates to products that may be patented and trade names that will eventually be legally protected. There is no good answer to this conundrum, so you must make a judgment call. The vast majority of business ideas are not unique enough that this issue becomes a problem, but that isn’t always the case. To resolve this dilemma, some startups provide just enough information in their business plans to entice their readers to want to know more and then reveal more information to interested parties on a case-by-case basis.

A full discussion on intellectual property and its importance is beyond the scope of this book. If you feel that patents, trademarks, copyrights, and trade secrets will be important to your startup, you should locate a credible publication to further acquaint yourself with the pluses and minuses of paying for intellectual property protection before you complete this portion of your business plan.

Chapter Summary

1. This chapter is divided into two parts. The first part of the chapter describes the operations section of a business plan, which focuses on how you will produce your product or service and run your business. This is an important section that should appear in every business plan. The second half of the chapter focuses on a topic that is singled out in some business plans and is not in others—the status of the development of a product or service.

2. The most important rule of thumb for writing the operations section and the product design and development section of your business plan is to focus on the aspects of each of these areas that are either essential to the success of your business or that sets you apart from your competitors. Routine topics should be dealt with lightly and quickly.

3. The operations plan section of the business plan outlines how your business will be run and how your product or service will be produced. The topics generally included are operating model and procedures, business location, facilities and equipment, and operations strategy and plans. Other topics may be included depending on the nature of the business.

4. A useful way to illustrate how a product or service will be produced is to include an operations flow diagram in your business plan. An operations flow diagram shows the key steps in the production of a product or the delivery of a service.

5. Although the operations flow diagram explains how a product or service is produced, there are other issues that are relevant for this section. These issues include an explanation of how your inventory will be stored and how frequently it will be turned over, a description of the length and nature of your product or service’s production cycle, an explanation of where bottlenecks are likely to occur in your manufacturing process or service delivery and how these will be handled, an explanation of how seasonal production loads will be handled without service disruption, an explanation of how your quality control will be managed, and an explanation of how your after-sale service, if applicable, will be handled.

6. This product design and development section of your business plan has four parts: development status and tasks, difficulties and risks, costs, and intellectual property. Many seemingly promising startups never get off the ground because their product development efforts stall or the actual development of a product or service turned out to be more difficult than anticipated.

7. Most products follow a logical path of development that includes product conception, prototyping, initial production, and full production. Depending on the sophistication of your product development or service development process, products and services typically pass tests that probe their performance and technical merits as they pass from one step in the development process to the next. You should explain the process you followed to move your product from one stage to the next.

8. If you are a very early-stage firm and only have an idea, you should carefully explain how a prototype of your product will be made. A prototype is the first physical depiction of a new product.

9. One sticky point in business plans is to decide how much to reveal about a company’s potential intellectual property, knowing that the plan will be read by people who ultimately won’t be involved with the venture. Although a company wants the readers of its business plan to fully grasp its potential, the fear is that by revealing too much, a startup risks losing the confidential nature of its plans, particularly as it relates to products that may be patented and trade names that will eventually be legally protected. The vast majority of business ideas are not unique enough that this issue becomes a problem, but that isn’t always the case.

Review Questions

1. Why is it important to include an operations plan in a business plan?

2. When writing the operations plan and the product (and service) design and development plan sections of a business plan, why is it important to strike a careful balance between adequately describing the topics and not going into too much detail?

3. What is the most important rule of thumb for writing the operations and the product design and development sections of your business plan?

4. According to the chapter, there is a vast difference between thinking up a new product idea and actually designing and manufacturing the product. Explain the nature and importance of this difference.

5. What is an operations flow diagram, and why is it important?

6. Identify three specific instances in which a business’s location is a critical factor in its capability to operate efficiently and effectively.

7. What is a product prototype, and why it is important?

8. Describe what usability testing is and why it is important.

9. To what extent should a startup be candid and transparent regarding the challenges and risks associated with its product development process?

10. What are the four types of intellectual property, and why is it important to address intellectual property issues in a business plan?

Application Questions

1. Fitbit ( http://www.fitbit.com ) is the name of a company that makes a product called the Fitbit Force, which is a wireless-enabled device that measures data such as the number of steps walked, quality of sleep, and other personal metrics. Spend some time looking at Fitbit’s Web site to get acquainted with its product offerings. What do you think were the major “operational” issues that Fitbit included in its business plan?

2. Discuss the manner in which a company like Fitbit can use “operations” as a means of gaining a competitive advantage over its competitors.

3. Imagine that you have invented a new type of backpack for students to carry their books on campus. As part of your business plan, you have decided to “outsource” the actual manufacture of the backpack to a company in China. Do some research to determine how you would locate a company in China to manufacture your backpack, and what type of arrangement you would likely enter into with them. How much information should you include in your business plan about the company and your arrangement with them?

4. Suppose you were working on a business plan for an upscale men’s clothing store. What factors should you consider in selecting the physical location of the store? How much attention would you devote to this issue in your business plan?

5. Image you’re planning to open a coffee shop named Mountain Fresh Coffee. Your coffee shop will be much like a Starbucks or a Caribou Coffee, and will be located three blocks from the campus of a major Midwestern university. Some of the unique aspects of your coffee shop are as follows: (1) You will only employ people who have a passion for coffee, (2) all the coffee you sell will be fair trade certified, (3) the ambience of your shop will be relaxed and unhurried, and (4) you will give back 10 percent of your after-tax profits to local charities. With these factors in mind, along with your own creativity and business sense, complete both a backstage and front-stage operations model for Mountain Brew Coffee. Make your operations model as extensive as the one for Prime Adult Fitness shown in the chapter.

Endnotes

1. B. Barringer, Launching a Business: The First 100 Days (New York: Business Expert Press, 2013).

2. Oopsy Daisy Homepage, available at  www.oopsydaisy.com  (accessed October 2, 2013).

3. Silpada Design Homepage, available at  www.silpada.com  (accessed October 2, 2013).

4. P. S. Cohen, Hungry Start-Up Strategy (San Francisco, CA: Berett-Koehler Publishers, 2012).

5. S. Rich and D. Gumpert, Business Plans That Win (Cambridge, MA: Harper & Row, 1985).

6. S. Shane, Finding Fertile Ground (Upper Saddle River, NJ: Pearson Education, 2005).