Marketing Plan Tips

unduhan-36A marketing plan is a core component of a business plan. It relates specifically to the marketing of a particular product or service and it describes:

  • An overall marketing objective
  • A broad marketing strategy
  • The tactical detail related to specific marketing activities
  • The various costs associated with these activities
  • Those tasked with delivering these activities by name

The starting point for any marketing plan is an analysis of the strategic context, as a typical objective for most plans is promoting a good or service as effectively as possible. An assessment of the company, its environment and its customers helps to ensure that the author of the plan obtains a holistic view of the wider context. In turn this helps them to focus their energies and resources accordingly. This is particularly important given that most marketing managers will be subject to that all-too-familiar constraint—limited resources (invariably financial). In effect, a marketing plan is produced to ensure that limited resources are allocated to activities that are likely to bring the maximum return.

An assessment of the context will include analysis of both internal and external factors. There are a number of frameworks and tools designed to assist you with this:

  • A SWOT analysis forces you to consider internal Strengths and Weaknesses alongside external Opportunities and Threats.
  • Porter’s Five Forces is a framework designed to assist you in considering the broader competitive and environmental context.

It is also vital that you have a thorough understanding of your customers; look to whether segments exist within your broad customer group that can be profitably served utilizing specific and targeted marketing activities.

Following an analysis of broader conditions, a marketing strategy can then be put in place. This strategy needs to include financials so that all activities can be assessed in the context of their cost as a portion of the overall marketing budget. Regardless of the product or service, the objectives tend to be similar for most managers; create awareness, stimulate interest in the offering, and ultimately (profitably) convert this awareness into sales. All these factors are intertwined and, hence, the importance of effective market planning.

Using a local restaurant as an example, their marketing activities are going to be predominantly concentrated within a two to three mile radius of their restaurant, as this area is where the vast majority of their customers are likely to come from. Tactically, there is no point in such a restaurant advertising on TV (even locally) as the cost would be prohibitive in the context of their business model. They are limited in terms of capacity (number of seats) and their average cost per head so that, even if they created huge awareness and interest via TV advertising, the resultant revenues would still be unlikely to cover the cost of the specific marketing activity. On the other hand, stuffing leaflets through local letterboxes is extremely targeted and comes at low relative cost, which explains the sheer volume of fast-food flyers most of us get on a daily basis.

The reader of the plan should clearly be able to relate to the marketing initiatives in terms of the message, the target audience and the means to accessing this audience. A good marketing plan will detail specifics, i.e., a number of marketing activities, their respective costs, and the expected return on investment. Measuring return on marketing has historically been one of the greatest challenges the industry has faced. The advent of PPC (pay-per-click) advertising via the Internet has finally resulted in managers being able to track sales resulting from specific campaigns and adverts. However, this is just one means of advertising, and calculating effective ROI (return on investment) figures for other forms, such as billboards and TV, remains as elusive as ever.

Sales That more accurately

unduhan-35Sales forecasting is an integral part of business planning. I have written on the subject of sales forecasting a number of times in the past. However, for many of us, we are now dealing with a level of uncertainty we have not encountered previously in our lifetimes. As a result, some managers are eschewing forecasting, given the volatile market conditions. For listed companies there is an added complexity to their forecasting. They are fearful that if they publicly announce their projections for the year, as they usually do, there is then a chance that their share price will be hammered if they subsequently fail to meet their targets. As a result, some have chosen not to give annual earnings estimates for 2009.

However, as a recent article in The Economist, “To forecast or not to forecast?” (28 Feb 2009) declared, ‘Precisely because peering into the future is harder today than it was a year ago, managers should be using every available means to gauge what the world could look like in the coming months and to establish targets using this analysis’.

The reasons given by managers for not planning or not forecasting are simply not tenable; added uncertainty increases the need for planning, rather than diminishing it. A recent case in Ireland serves to illustrate the difficulty people find themselves in. It was reported that the new CEO of the C&C Group (Magners Irish Cider), John Dunsmore, had issued “a thinly veiled criticism of the Magners Cider maker’s previous management by hitting out at overstocking and over investment and writing down the value of the company’s manufacturing plant. ” In this instance the forecasting was imprecise and the result was overproduction and over investment against a backdrop of declining sales.

Sales forecasting, budgeting, and business planning are vital management activities regardless of the size of the business or the level of uncertainty we face. As the above example illustrates, sales forecasts are not just for the benefit of the business plan reader, but are a means to help managers make informed decisions. Looking to the future to help make decisions is always going to be an imprecise science, but there are ways to forecast sales with some degree of probability. The key elements are to (a) identify the key factors that are likely to impact on demand and (b) then consider a range of plausible outcomes. This is, in fact, scenario planning, whereby a number of plausible scenarios are considered, discussed, and then assigned probabilities.

As I stated in my article, Planning in Times of Extreme Turbulence,
“The importance of scenario planning grows when uncertainty increases. Scenario planning is when management considers a range of plausible future outcomes ranging from a ‘small stretch of the imagination’ to the ‘outlandish’.The aim is to think through the implications for the company if certain scenarios came into effect. For example, what would happen if sales decline by 20% or if oil doubles in price in 2009? By thinking through a number of plausible scenarios, and designing strategies to deal with such eventualities, companies will be better prepared if one of the scenarios does, in fact, occur.”

As the key variables are also identified, management can then keep a much closer eye on data points to help them predict likely outcomes, i.e., implications of interest rate movements, implications of currency fluctuations, etc.

Summary
In summary, while it is tempting to conclude that forecasting and planning is pointless in the volatile economic circumstances we face, the reality is that planning is more important than ever before. It is also worth remembering that the historic view of a business plan as a formal document is dated. Business planning is an ongoing process covering cash-flow management, sales forecasting and setting milestones, which business plan software products such as Business Plan Pro can help facilitate.

The numbers you need to know

unduhan-37Those familiar with the BBC2 show Dragons’ Den will be all too aware of the following scene. The entrepreneur is tasked with presenting his business plan to a panel of investors (i.e., the Dragons). The business plan pitch is going well, and then one of the dragons asks the simplest of questions,
”What was your turnover last year?” The camera pans in, the participant stutters, eventually he declares that he is ”not sure” and before you know it, he is sent packing. Why do entrepreneurs consistently fail to appreciate how important it is to have financials in hand when pitching an idea? Why do they consistently present a business plan without even a rudimentary knowledge of basic financial concepts, such as turnover or margin? This article highlights some of the financials that any aspiring entrepreneur needs to know before submitting or pitching a business plan to a ‘dragon’ of any hue.

Firstly, let’s consider the context. Investors have a range of investment options available to them. While depositing cash in a bank is low risk, it is not the most exciting option and associated returns are likely to be low. Angel Investors or Venture Capitalists are looking for investment growth opportunities that offer the potential of a greater return; which naturally come with a commensurate increase in the risk. The level of risk is dependent on a number of things; the market risk (whether there is a market opportunity and the extent of it) but also risk relating to the decisions made by the agent (i.e. the entrepreneur).

With debt funding such as a loan, the investment is typically secured on some assets and the repayment schedule will guarantee monthly income streams to repay same. When it comes to equity financing, the risk dynamic increases considerably. Why? Because decision-making is in the hands of the entrepreneur, not the investor. An investor must endeavour to ensure that the incentives of the agent (the entrepreneur) are aligned with his or her own. This ensures that investment is not spent on non-income-generating investments or perks. This is commonly referred to as the ‘principal agent problem’ by economists.

Potential equity investors will also be keen to assess whether the entrepreneur will be a competent business manager. To address these concerns, the investor will be looking to not only understand the product and market opportunity, but also to understand the abilities of the management team tasked with delivering the opportunity. Hence, the entrepreneur needs to be confident, knowledgeable, and trustworthy but also au fait with the underlying financials for the business.

In assessing these risk factors, historic data will play a crucial role in the investors’ decision-making processes. Investors will be trying to assess the existing cash generation capability of the company and also the free cash flows that remain once all other obligations have been met. Hence, someone claiming to not know turnover or net profit figures from past trading probably has something significant to hide. If figures are low, that is fine, provided you can explain why some of the figures were not as you would have wished. If you have not begun trading, the risk profile increases dramatically and as a result you should expect an increase in the equity stakes required by interested investors. The three headline figures to be particularly cognizant of are Turnover/Revenue, Gross Profit and Net Profit. The figures for these provide an indication to the investor as to the level of demand for the good or service and also whether this demand can be met profitably. If you have been trading, you need to have a firm grasp on the P&L figures and also a good explanation for the underlying performance to date.

Once you have covered off the key financials, and the “dragon” is willing to invest, the focus will shift to the following:

  • The value of the entire business.
  • The percentage of the business you are prepared to sell.
  • The value of the share.

Use a multiple of earnings or an assessment of future income streams to estimate the value of the business, and then decide what level of equity you are prepared to offer in return for a cash investment. Most investors are pretty sophisticated when it comes to financing, and hence, you will be at a disadvantage. This is their area of expertise; they are seeking an appropriate risk/return for their investment. Their primary interest will be to assess the ability of the company (including management) to generate free cash flows to enable the business to grow while also returning cash to them. It is recommended that you get some advice with this area before you enter the den. It is important that there are no complex structures in place vis a vis where the value lies, the company structure, or existing shareholders. Dragons do not like surprises- so don’t deliver one, especially right at the end!

Finally, it is worth having a walk away point in mind. If the offers from the dragons do not match the valuation you have placed on the company and the stake on offer, be prepared to walk away. If you get to this stage and have some offers on the table, it is likely that you will be able to secure funding elsewhere at a level closer to your valuation.

All About Funding

Most businesses need financing. Cash flow is different than profits, so profits don’t guarantee money in the bank. There’s financing needed to manage starting costs, stock waiting to get paid, and other factors. Much of that is what we lump together as “working capital.”

Most people think of financing as debt, borrowed money. In this context it also includes investment capital. Either debt or investment is outside financing that helps a business meet expenses and grow. While some smaller businesses get by without financing, and even some medium and large businesses that are mature and stable and conservatively managed can get by without financing, most businesses need some outside money to get started, to expand, and to supply their regular needs for working capital. (Working capital, by the way, normally means cash in the bank to cover cash flow deficits caused by normal flow of the business. Technically, it is current assets less current liabilities. )

Your business plan should tell you whether or not you need financing, and how much. The plan should estimate cash flow for your company and if cash flow is negative for any good reason – and there are good reasons – then you plan to add money as either loans or investment. The most common reason for needing financing, by far, is “Debtors.” That is the accounting term for the amounts of money a business is waiting to receive from customers for sales already made but not paid for. Most business-to-business sales involve delivering an invoice and waiting to get paid. Businesses that sell this way have to deal with collecting money owed, and while they wait to collect, they have bills to pay. Therefore, they need financing.

Another common reason for financing is paying for stock. To sell things you need to buy them first. Often you have to pay for your stock before you sell it. That means you need financial resources to deal with pay cycles.

Start-up businesses often need financing to cover their initial costs and expenses while they are starting, before they can start selling.

A correct business plan process will point out the gaps that need to be filled with financing. For a start-up company, use the plan to help calculate needs and early expenses and the early deficits as the company gets started, and then plan to fill those needs with borrowed money or investment. If you can’t get enough finance to cover the needs, then you must either change the plan to reduce the needs, or don’t start the company. For an ongoing company, use the plan to calculate cash flow from normal operations, and turn to financing as needed to support working capital requirements.

Don’t be surprised by needing financing. Most businesses do. Some smaller, cash-only businesses get by without financing. They sell for cash, buy in cash, and don’t spend what they don’t have. It’s easier to get by without financing as a service business than a product-based business, because you don’t have to deal with stock. A home office is less likely to need financing than a business location you rent. A one-employee-business is less likely to need financing than a business needing employees.

Are You Need a Business Plan

For me this scene encapsulates perfectly the problems of not having an over-arching goal and plan for your business. Without a plan, or using a cookie cutter business plan template a business is essentially rudderless, and day-to-day activities are likely to be haphazard and reactive, in stark contrast to those businesses implementing a well thought out business plan.

The following represents a list of my top five reasons a firm needs a business plan.

1. To map the future

A business plan is not just required to secure funding at the start-up phase, but is a vital aid to help you manage your business more effectively. By committing your thoughts to paper, you can understand your business better and also chart specific courses of action that need to be taken to improve your business. A plan can detail alternative future scenarios and set specific objectives and goals along with the resources required to achieve these goals.

By understanding your business and the market a little better and planning how best to operate within this environment, you will be well placed to ensure your long-term success.

2. To support growth and secure funding

Most businesses face investment decisions during the course of their lifetime. Often, these opportunities cannot be funded by free cash flows alone, and the business must seek external funding. However, despite the fact that the market for funding is highly competitive, all prospective lenders will require access to the company’s recent Income Statements/Profit and Loss Statements, along with an up-to-date business plan. In essence the former helps investors understand the past, whereas the business plan helps give them a window on the future.

When seeking investment in your business, it is important to clearly describe the opportunity, as investors will want to know:

  • Why they would be better off investing in your business, rather than leaving money in a bank account or investing in another business?
  • What the Unique Selling Proposition (USP) for the business arising from the opportunity is?
  • Why people will part with their cash to buy from your business?

A well-written business plan can help you convey these points to prospective investors, helping them feel confident in you and in the thoroughness with which you have considered future scenarios. The most crucial component for them will be clear evidence of the company’s future ability to generate sufficient cash flows to meet debt obligations, while enabling the business to operate effectively.

3. To develop and communicate a course of action

A business plan helps a company assess future opportunities and commit to a particular course of action. By committing the plan to paper, all other options are effectively marginalized and the company is aligned to focus on key activities. The plan can assign milestones to specific individuals and ultimately help management to monitor progress. Once written, a plan can be disseminated quickly and will also prompt further questions and feedback by the readers helping to ensure a more collaborative plan is produced.

4. To help manage cash flow

Careful management of cash flow is a fundamental requirement for all businesses. The reason is quite simple–many businesses fail, not because they are unprofitable, but because they ultimately become insolvent (i.e., are unable to pay their debts as they fall due). While the break-even point–where total revenue equals total costs–is a highly important figure for start-ups, once a business is up and running profitably, it becomes less important.

Cash flow management then becomes more vital when businesses pursue investment opportunities where there are significant cash out flows, in advance of the cash flows coming in. These opportunities need to be assessed against any seasonal variations in the business and the timing of the flows. If you are a “cash-only” business, you can bank the income immediately; however, if you sell on credit, you receive the cash in the future and hence may need to pay some of your own expenses before that income hits your account. This will put a further strain on the company’s solvency and hence a well structured business plan will help you manage funding requirements in advance.

Products for Starting a New Business

Starting a business is an incredibly exciting time for any entrepreneur; however it can also be stressful with so much to do in so little time. The start-up phase is also characterized by significant expenditures against a backdrop of uncertain income. However, there are a number of products and services that can help you maximize your chances of success while also saving you considerable time and money. This article aims to introduce you to some of the less obvious ones that are available via the Internet. These products and services can help you set your business on the right path from Day One. While these recommendations will not be appropriate for all, those who need to bootstrap and build their business the hard way will benefit the most.

1. Create a website

Regardless of whether you intend to sell online or not, all new start-up businesses should secure a domain name and create a website as soon as they can. Thankfully, the cost of getting a site set up has fallen significantly over time and there are now a host of different packages and providers to choose from.

2. Download a profile of your industry

The factsheets, reports and guides from Scavenger are essential reading material for anyone starting up a business in the UK. The Business Opportunity Profiles are downloadable reports on specific UK industries. With over 800 reports in total, the range includes everything from ‘Children’s Day Nursery’ profiles to ‘Coffee Shop’ profiles to a profile on ‘Wedding Planners’.

Where: www.scavenger.net Cost: Individual reports cost around £5.

3. Set up your company accounts

One of the big challenges start-up companies face is managing cash flow. Insolvency is one of the main causes of failure for entrepreneurs in the UK. However, with some careful and appropriate financial planning, cash crunches can be avoided. While this in itself is an important reason for buying a bookkeeping package, there are countless other reasons ranging from the ability to manage invoices through to managing payroll. The two main recommended introductory packages are QuickBooks® Simple Start from Intuit® and Sage® Instant Accounts. View online demos before you purchase.

Where: www.sage.co.uk and www.quickbooks.co.uk Cost: From £43.97 at www.amazon.co.uk

4. Download business planning software

When you start up it is important to write a business plan to ensure you adequately plan the future of your business. The very process of creating a plan is beneficial, not least because it forces you to take a holistic view of your company. Business Plan Pro is the best-selling business-planning software available. It is easy to use, saves time, and has over 500 sample plans to get you started. It is also available via download so you can get instant access to it and hence pay no postage and packing.

Where: Business Plan Pro is available from www.paloalto.co.uk Cost: RRP is only £79.99 for the Standard version and £129.99 for the Premier.

5. Save costs on your phone

Using applications such as Skype together with a headset, it is now possible to make telephone calls from your computer at a very low cost. There is no need to commit to a monthly phone contract with line rental. Instead you can just pay as you go. You can also obtain a Skype number so people can call you back. However it is recommended that all start-up businesses do have at least one fixed line number they can be contacted on. Finally, you should also consider getting a portable number that is easy to transfer if you move offices.

Be an Entrepreneur

1. Introduction

In a world increasingly affected by globalisation, increased competitiveness and maturing products, the need for creativity and entrepreneurship has never been greater. Luckily, the attractions of becoming an entrepreneur have never been greater either, especially since a shift from a predominantly manufacturing- to a service-based economy has lowered the cost and barriers to entry for entrepreneurs. The British government has moved entrepreneurship (and support for it) to the top of their domestic agenda. Meanwhile, entrepreneurship has become a hot topic, with conferences, exhibitions, and even TV shows, such as “Risking it All” and “The Dragons’ Den” evidencing the popularity. But while the environmental conditions may be attractive, entrepreneurs still need a workable idea that is commercially viable. This article endeavours to assist wannabe entrepreneurs (wantrepreneurs) in coming up with ‘the plan’ so as to enable them to finally take the plunge into the world of entrepreneurship.

2. The environment

Before deciding on ‘the idea’ it is worth assessing the landscape thoroughly so as to consider the broader context and the impact that trends or changes may have on it, i.e. whether it is future-proof, etc. There are three main trends to look at – global trends, national trends and local trends.

Keeping up to date with global developments via The Economist or the BBC will certainly give you a good base to start from. However, to gain a more in-depth understanding of global changes from a business opportunity perspective, websites such as Trendwatching (www.springwise.com) are very useful. In an increasingly homogeneous global economy, it is obvious that what works well in one market can easily transplant into other ones with the minimum of localisation. Between them, these sites give a more in-depth insight into some of the latest emergent business ideas and can be considered in tandem with macro trends affecting us all, like environmental challenges, the increasing cost of oil, volatile currencies, etc.

On a national level, there are a number of trends that we are all familiar with in the UK: increased ubiquity of broadband access, the fact that as a population we are aging, increased expected life spans, growth in the number of single-person households, and so on. The key with all of these trends is to focus on the opportunities associated with these demographic shifts and trends. For example, it is safe to predict that an aging population will increase the demand for certain goods and services, such as home-help services, medication, nursing, and glasses, and that the growth in single-person households will increase the demand for convenience food products and more economical white goods such as smaller fridges and washer/ dryer all in one’s.

On a local level, there are also numerous resources we can use in assessing the local environment and, in particular, the likely demand for our goods or services. Websites such as ACORN (www.caci.co.uk/acorn) and UpMyStreet (www.upmystreet.com) provide extensive free demographic data about areas based on UK postcodes. These enable you to build up profiles of the local population and are ideal when you are looking to set up a shop or service to serve the local community specifically. Of course when it comes to local opportunities, these need to be assessed in conjunction with plenty of ‘on-the-ground’ research: walking in and around the area targeted for the new enterprise.

3. The options

The big idea

Whilst the majority of new businesses are replicas of existing businesses, some entrepreneurs will strive to create something completely unique. One of the most powerful things the Internet enables us to do is to search for solutions to problems more efficiently than ever before. Goods and services are designed to fulfill the needs of people. In other words, goods and services solve people’s problems; and while your proposed solution may be unique, it is likely the problem is not. Hence, an Internet search focusing on the problem your solution is trying to address is likely to highlight substitutes and competitors, which may all help to shape the nascent idea.

Using the Internet, you can often assess the potential demand for your service by gauging the number of people who search for a term related to the problem that your good or service satisfies. For example, our company, Palo Alto Software, produces business planning software. One way people find us online is by searching for help for their problem: their need to write a business plan. Using the Key Word Assistant on Overture, we can find out how many times “business plan” and other related terms were searched for in the previous month. This data can help us assess whether business planning is a significantly more popular term than “business plan”? If so, we might consider renaming our product “Business Planning Pro” instead of  Business Plan Pro.

Write a Business Plan

If you, like many entrepreneurs, are time rich and cash poor, option 1 quickly removes itself from the equation, given the cost of having someone write a plan for you.

You are then faced with the choice between using Business Plan Pro or building everything yourself, from scratch, in Microsoft Word and Excel. Why are we not recommending other business plan software options? Because Business Plan Pro is the best business planning software available – without exception. Palo Alto Software (the maker of Business Plan Pro) has a proud history, has had category leadership for years and has extensive lists of testimonials and independent reviews on the website, all corroborating this view. By all means, consider other software options; however, we are confident that your own analysis will reveal that Business Plan Pro stands head and shoulders above the alternatives.

When it comes to using Word and Excel there are undoubted benefits – not least the fact that they are ‘free’ in the sense that they are bundled on most PCs. The interface is also familiar, given the popularity of their use. However, while these tools are excellent when you know exactly what you need to produce, they offer negligible assistance when it comes to producing specific content, such as that required for a business plan. If the purpose of the business plan were simply to jot down a few notes to keep you on track, they would suffice. However, if you intend to circulate the plan to peers, colleagues or prospective investors, you will need to produce a plan worthy of your name. After all, you are the author!

Here are the reasons why we believe that using Business Plan Pro is the easiest way to write a business plan:

1. Offers significant time saving

Business Plan Pro was designed to help you write a plan as efficiently as possible. It comes with extensive help, lots of examples and expert advice.

2. Provides the structure

Business Plan Pro walks you through a list of specific tasks, step by step, in stark contrast to the blank screen and flashing cursor you face when you create a new document in Microsoft Word.

3. Includes hundreds of examples

Business Plan Pro includes over 500 sample plans so you can browse plenty of examples to help give you ideas.

4. Ensures you do not leave out any sections

Over ten years of history means that we know what sections to include, where they should appear in the document and what you need to put in them.

5. Makes the numbers part easy

We recognise that while compiling the financials is an essential part of any plan, it is a very challenging area. We have simplified this process with the inclusion of easy-to-use financial wizards and automatic calculations, linking together all the financials from Start-up costs to Sales Forecast to Personnel Expenses to Cash Flow to Profit and Loss.

6. Free support available

Alongside the extensive in-product help, we also offer a free support line and a comprehensive help facility on our website.

The Dragons Perspective

The BBC2 show Dragons’ Den is now in its ninth series, and while the show is obviously edited to entertain (more than anything else), it seems as if the current bunch of contestants has not watched any of the previous shows! Week after week they appear – often repeating the mistakes of previous contestants. This article attempts to shed some light on the key mistakes being made and recommends some key changes required by future entrepreneurs pitching to investors. Obviously, the lessons here will apply regardless of which finance sources you intend to approach.

1. Complete a business plan in advance

The first thing that is evident is that many of the entrepreneurs appearing on the show have a business idea, but have no clue as to whether the idea is commercially viable or not. A business plan forces entrepreneurs to cover all aspects of the business – not just the idea. If a thorough business plan has been produced, entrepreneurs should be able to handle most questions the Dragons throw at them. They are not trying to catch the participants out. They are simply trying to assess the opportunity to determine whether it is a credible investment option for them. Usually the idea is easy to grasp from the presentation – what prospective investors really want to understand is whether there is a demand for the product, what the scale of that demand is, and how these markets can be accessed.

2. Know the basics

The investor is seeking to diversify their portfolio, investing in some high-risk ventures in return for some attractive upside return. The entrepreneur is seeking investment to develop the idea further. If the company is currently trading, you will be required to have clear answers as to the current actual turnover, gross profit and net profit. Any vagueness regarding these rudimentary financials will set alarm bells ringing. Any credible business person will be expected to have a grasp of these numbers, and an investor will need to know them to make an informed decision as to whether to invest.

3. Share data and information truthfully

There is an information asymmetry between the entrepreneurs and the Dragons, i.e. the entrepreneurs have a lot more information to hand than the Dragons. The investors have to rely on the data the entrepreneurs provide when they assess the risk and the likely return. Hence, unless the entrepreneurs provide the information in their presentations, the investors are going to be asking for it. The information that is provided had better be accurate, as the due diligence that follows will examine the data in detail and will need to substantiate the figures provided in the Den. While it is natural to not want to divulge a lot of information, without it the Dragons may be reluctant to invest.

Company Machine Learning Ready

In recent years, there has been a staggering surge in interest in intelligent systems as applied to everything from customer support to curing cancer. Simply sprinkling the term “AI” into startup pitch decks seems to increase the likelihood of getting access to funding. The media continuously reports that AI is going to steal our jobs, and the U.S. government seems as worried about the prospect of super-intelligent killer robots as it is about addressing the highest wealth disparity in the country’s history. Comparatively, there has been very little discussion of what artificial intelligence is, and where we should expect it to actually affect business.

When people talk about AI, machine learning, automation, big data, cognitive computing, or deep learning, they’re talking about the ability of machines to learn to fulfill objectives based on data and reasoning. This is tremendously important, and is already changing business in practically every industry. In spite of all the bold claims, there remain several core problems at the heart of Artificial Intelligence where little progress has been made (including learning by analogy, and natural language understanding). Machine learning isn’t magic, and the truth is we have neither the data nor the understanding necessary to build machines that make routine decisions as well as human beings.

That may come as a disappointment to some, and potentially disrupt some very expensive marketing campaigns. But the likelihood of self-directed, super-intelligent computational agents emerging in the foreseeable future is extremely low — so keep it out of the yearly business plan for now. Having said that, an enormous amount can already be achieved with the machinery we have today. And that’s where forward-thinking managers should be focusing.

Over the next five to 10 years, the biggest business gains will likely stem from getting the right information to the right people at the right time. Building upon the business intelligence revolution of the past years, machine learning will turbocharge finding patterns and automate value extraction in many areas. Data will increasingly drive a real-time economy, where resources are marshaled more efficiently, and the production of goods and services becomes on-demand, with lower failure rates and much better predictability. This will mean different things for different industries.

In services, we will not only get better at forecasting demand, but will learn to provide the right product on a hyper-individualized basis (the Netflix approach).

In retail we will see more sophisticated supply chains, a deeper understanding of consumer preferences, and the ability to customize products and purchase experiences both on- and off-line. Retailers will focus on trend creation and preference formation/brand building.

In manufacturing there will be an evolution towards real-time complete system monitoring, an area known as “anomaly detection.” The components will become increasingly connected, allowing for streams of real-time data that machine learning algorithms can use to reveal problems before they happen, optimize the lifetime of components, and reduce the need for human interventions.

In agriculture, data will be used to decide which crops to grow, in what quantities, in what locations, and will render the growing process more efficient year after year. This will create more efficient supply chains, better food, and more sustainable growth with fewer resources.

In short, AI may be a ways off, but machine learning already offers huge potential. So how can managers incorporate it into daily decision-making and longer-term planning? How can a company become ML-ready?