Aim of the Chapter
Key concepts introduced in the chapter
Defining an Aim
A management team needs to establish a clear business aim, which must be the ultimate purpose of the project for which they are considering external finance.
Aim v Project
It is vital not to confuse the aim with the proposed idea or project. The idea or project is the means by which the aim is made possible and is not an end in itself. Therefore "to develop a the radically innovative mark 2 widget" should not be an aim. However, the development of the mark 2 widget might enable the company "to increase our market share to 50%" or "double our net profit over three years" both of which would be valid aims.
What is a Legitimate Aim?
The nature of the aim can vary. In business it should include some quantifiable element, since business performance is measured in quantifiable terms: profit, cashflow, turnover etc.
Whether it should always be reduced to a measure of profit is more difficult to judge. Ultimately the success of a business lies in its ability to generate sustainable profit for its shareholders or owners. Whether this should be year on year profit growth is much more debatable. After all, achieving long term sustainable profit may best be served by a short term aim which is not profit related, perhaps an increase in market share or the successful introduction of new production technology. Herein lies the dilemma at the centre of the City's present debate over "short termism"
Furthermore, the distinction between aim and project is not simply semantics. It is, for example, all too easy to pursue excellence, or outstanding innovation, in a new product once the enthusiasm of a development team is fired up, but the product's performance, cost, functionality and quality must be tailored to meet the specific aim of the project. The aim any well be to position the new product in a market niche where the performance needs to be no more than adequate but where reliability and price are critical.
Testing the Aim
So throughout the planning process, and afterwards, the project must be tested against the aim. In a physical product project: will the product features which are proposed for the mark 2 widget actually make sufficient impact on target customers to achieve the increase in market share? Are the costs involved in developing the new product justified by the reasonable projected return? Most crucially, is there a better, or more cost effective, or even less risky alternative strategy for achieving the aim? In a venture capital project: should we look at a buy out or a buy in or should we consider a start up?
Often it is clear that there is only one possible route for the proposed project even before going through the formal discipline of selecting the aim. It may simply not be feasible to look at, say, a buy out or a buy in because the owners of the potential targets simply will not sell. However, distilling an aim does force a management team to go through a process which may lead them to looking at alternatives which they might otherwise have disregarded. It may lead them to realise that other aspects of what they are considering, besides the type of project, are unsound. For example, it may become clear that their ultimate aim may be threatened by excessive borrowing and they can go into the process of appraising different projects, or setting the deal structure for which they are looking, with this in mind.A management team can often achieve their business aim by several different routes.
If they already own their business (or are satisfied with their stake, if any, in its ownership) then they their aim is likely to be to develop that business. They could develop it by acquiring new plant or buildings, introducing new products or by acquiring a competitor, customer or supplier. Even as owners, they may decide that their present business is not the right vehicle to achieve their aims and sell it in order to raise capital to purchase or set up the business which they do want to develop.
Managers' Aims versus Owners' Aims
Managers who want to own their own business rather than develop it for shareholders, face similar choices but with the added requirement of having to achieve ownership first. They could, for instance, try to buy their own business or some other business or, alternatively, start a completely new venture.
To make matters more complicated, many projects for which a management team seeks external finance are an amalagam of one or more types of deal. A management team buying a business may consist of managers both from within and outside the business making the project a hybrid of buy out and buy in. A deal in an established business, where there is no change of managerial control, may involve both a purchase of new shares (to invest in the development of the business) and the purchase of existing shares (perhaps from retiring management or family shareholders): this has the characteristics of both a share restructuring deal and a development capital project.
Types of Financing
All these possible projects: development funded by investment, management buy out (buy out), management buy in (buy in), start-ups and even pre start-up feasibility or product testing projects separate category of external financing project, with its own ground rules and attractions and limitations for investors and lenders.
This section of the book describes the characteristics of each of the main categories of externally funded project and points out the key issues which a management team should bear in mind when deciding However, to get to that point, a management team needs a clear idea of its ultimate business aim and the section starts with an aide memoire to help evolve that aim.
Following the well tried military maxim, the aim should be "a clear statement of purpose, expressed in a single sentence with a simple verb in the infinitive" of the ultimate objective of your business idea or project. Therefore the aim of an acquisition could well be "to double turnover and treble profitability by 199X", or of a new business idea could be "to establish a company with a Y% market share of the widget market by year 3". That is not to say that either of these examples are laudable or even feasible, merely that they meet the criteria of being simple and clear.
