Deliberately Profitable Biofuel

By Robert M. Bailey | February 09, 2011

The Sierra Club's David Brower once said, “There is no business to be done on a dead planet.” Some in the biofuel business may agree. The challenge in biofuels, however, is that they are also a business. And so we might add this corollary, “There is no business to be sustained without monitoring gross margins.”

Gross margins can be established to reflect business metrics that act as a barometer of a business’ health and competitiveness when compared to the rest of the industry. Increasingly the biofuels industry is finding itself like any other. Despite a huge potential global demand for the fuel, if the processing costs of a business become too high and cannot be passed along to the ultimate buyer (exclusive of blending and tax credits), then that biofuel business is likely to be unsustainable.

In preparing a biofuel business for funding, we explore management’s thinking and pinpoint the strengths and weaknesses of their business plan. The SWOT is a tool we include in every business review. Locating the strengths, weaknesses, opportunities and threats, provide valuable insights, but no measurable tools to run or improve the business.

The biofuel industry is being impacted by the speed of communication and innovation at least as much as other global industries. Those increases are forcing changes in how it will manage information. Success there will mirror their financial successes. To address the speed of change up front, we recently revised our review process to include discussion about monitoring ongoing pricing and profitability. In essence, we are replicating the system advocated by John Mullins and Randy Komisar in their book, “Getting to Plan B: Breaking Through to a Better Business Model.”

Komisar, a partner in the legendary venture capital firm Kleiner Perkins Caufield & Byers in Palo Alto, Calif., began noticing that most original business plans failed. The home run ideas that produced big, sustainable profits resulted from reworking a core innovation. The breakthrough of Plan B often identified a new niche or totally different application. Plan B usually proved to be the better investment.

The gross margin model supports the success of Plan B. It represents the “best of” in four elements of a process of getting to Plan B. There are two types of models to explore. The analog is a broad industry approach to a market. Comparing say, the iPhone and the Droid benefits might be the analog for your new smartphone concept. The antilog represents those company approaches and new solutions that were risky—but worked. A good example here is Netflix, which is shattering the model for delivery of timely home video entertainment. Considering your analog and antilog models unearths new thinking and insights about your processes and customer behavior. Additionally though, it spurs the iterative steps of rethinking a product to distinctiveness.

The assumptions about industry standards and customer habits give way to the leap of faith. This is the third element. It tests a new idea and leads to its refinement. Your revised approach works. It doesn’t. Or, it’s back to the drawing board.

The process of refinement continues through to the creation of the fourth element, dashboards. Dashboards in themselves represent the process of developing useful metrics for increasing gross margins. Answers that surface on your dashboard might address the following questions. How low can we drive our costs? How high can we price our products? Are there other ways to manage the margins of each of our products? How can we adjust our gross margin model to give us a competitive advantage in ways that others in the industry lack?

An industry comprised of many engineers can anticipate flexibility, adaptiveness, and precision. What is new here is the deliberate driving of process technologies into actual cost advantages. Furthermore, your company is distinguishable for its value-adding competence for regular, measurable innovation and quality improvement.

It may be enough to simply live another day to supply the market with green fuels and byproducts. For those who want more, correlations to the gross margin represent quality and business sustainability. That may be what you need to identify your own Plan B.


Robert M. Bailey
Biofuel Financing Advisor/Broker, Trusted Advisory
(646) 472-5213

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