Business Plans Don’t Work
Nine out of ten business start-ups, and one in six business transformations will confirm it. Learning from the failures of the past, it becomes clear that we have been missing a key step in the execution of our business plans. That key step is the discovery of what works. In this three part series, I’ll look at the way in which business plans lead to failure, the way in which business model innovation can help, and the mindset that is needed to succeed in discovering a new path towards business success.
What’s Wrong with a Business Plan?
The business plan is widely accepted as the starting point for most major business initiatives, whether they are launching a new start-up, creating a new product line, or transforming existing operations. Here’s how it works, illustrated for a start-up:
Our first problem is with the business plan itself. Without a dedicated period of validation, most business plans remain firmly in the realms of fantasy. They contain guesses about who the customers will be, guesses about what product features customers will demand, guesses about how much revenue will be generated, and guesses about expected production costs. It doesn’t matter how good the analysis is, until you have tried it out…it’s still a guess.
As an execution document, it is hardly surprising that 9 out of 10 new businesses will fail. As Steve Blank says, executing a business plan in this way is not a strategy, it is a prayer. Let’s take a look at some of the activities which are not being done:
- The business is not validating who its customers are, what problems the product is solving, or how well the product is meeting customer needs
- The business is not finding out which customers will actually buy the product, which distribution channels and pricing strategies work best, or whether the sales model will scale
- The business is not revisiting the business plan in any way, or making any corrections as it discovers new information about its customers, its suppliers or the operational activity needed to generate revenue
- The business is not controlling cash burn, or waiting to find out whether the business model actually works before committing itself to a series of execution milestones and sales targets
What are the Risks of Getting it Wrong?
It’s not just start-ups that seem to suffer from blind faith in their business plan. A quick look at the history of failed business transformations makes for sobering reading:
- London Stock Exchange abandon moves to paperless share settlements, loss $400m (1993)
- Denver Airport abandon automation of thir baggage handling, loss $250m (1994)
- Levi Straus lose access to three US distribution centres for a week following the failure of its supply chain automation program, loss $192m (2003)
- Sainsbury’s abandon a supply chain automation program, loss $564m (2004)
- Ford Motors abandon an upgrade of their purchasing system, loss $400m (2005)
- Federal Bureau of Investigation abandon electronic case management, loss $170m (2006)
Note that Levi Strauss and the London Stock Exchange had original project budgets of $5m and $6m respectively (yes, that is a 13,200% cost overrun for the LSE)! Far from being the exception, a recent study by Oxford University’s SAID Business School suggests that these apparent outliers are actually far more frequent than we might think. With one in six large IT projects expected to suffer a cost blow out of at least 200%, executives should brace themselves for spectacular failure on the road ahead.
The reasons for these extreme failures are varied, but typically include (i) poorly defined and evolving user requirements, (ii) un-validated delivery schedules, (iii) a lack of user involvement, and (iv) a level of customisation which overstretches both management and technical resources alike.
In part two, Business model innovation, I’ll look at how the business model canvas can be used in a discovery based approach to business planning to help turn business planning fantasy into business planning reality.
image credit: freelanceswitch.com
Brendan Coram is a Management Consultant at The Birchman Group where he specializes in ITSM, ITIL v3, organizational change, business process improvement, workshop facilitation, asset management, project management, and innovation. He leads performance improvement initiatives for organisations in government, transportation, telecommunications, and professional services across Australia.
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There’s one case when business plans can help a small business — getting a loan. A recent study said that only one-third of small businesses have a business plan, and it’s helped those that provide them to the bank in getting a loan.
It will get you the loan (as long as your investors believe your claims), but can land you in trouble when you fail to meet your targets and want to start changing the assumptions that got you the loan in the first place. Hence the need to find a way for revisiting the business plan without alarming people
Banks typically want to know how you will repay the loan before approving. Be business plan is one component that helps.
I basically agree with Brendan. There is considerable research on this issue which shows that many succesful organizations never had a business plan. However, banks will want them and investors will want them and so that makes them a little like a resume. It is a necessary but not sufficent condition to get a job. A busines plan needs to be approached with a more realistic set of goals in mind. A key question is whether one should be done if money is not going to be solicited. I would say yes, if a realistic attitude such as Brendan presents is used in formulating the plan.
Again, a great way to get a loan but what do you do when you need to tell investors the plan was wrong and you’d like to change it? See part two for some suggestions on this
Getting a loan should happen after you have discovered what real problem you are solving and verified you have enough market to sustain a business(product/market fit on Customer Validation Phase) and to scale and build the real company you get a loan. Loan on the beginning of startup from a VC point of view is risky so more % of your business will take. Business Plan “still” works in large organizations where offering existing solution to an existing market, where budgets and forecast can be done (but not disruptive innovation happens). Start-ups runs on a high uncertainty environment, more often creating new solutions to a new market, so rapid hypotheses testing and learning is required, that’s why Business Canvas, Customer Development, Design Thinking, Agile fits well.
I agree, with EVERYTHING!
Yes, business plan is needed or a startup seeking a loan but in it’s earliest stages, a startup is a concept that can likely be implemented through strategies that require little or no funds. Once the start up has legs, the business plan can be created from the perspective of an idea that has demonstrated it works. I have found that people seek loans and then end up in a hole financially and so unable to realize the start up dream.
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@GlobalJackie
While I agree that successful transformation is not the product of guesses in a business plan, I believe that a biiger problem is the business plan itself. Mr. Coram refers to traditional analytics such as revenue and articulated consumer demand for products and feature as tenants of a business plan. To vet “size of prize” analytics in a business plan is to restrict yourself to the current market in an industry in which you are already failing (which is likely why you need a transformation). The solution for such woes as articulated above has more to do with new ways of research, which Mr. Corum agrees, AND non-traditional metrics. There is no business case that EVER would have been approved by the street for iTunes because it was such a pirated business venture at the time. Transformations are hard because it forces business people to abandon all of the experiences that made them successful leading up to the present. Being more educated in your growth initiatives before investing is smart, restricting yourself to a traditional business case to make investment decisions is not. And better metrics can allow business leaders to mitigate risk while still driving change in the organization, and, more importantly, in their industry.
It’s the same as with all planning: “It’s not the plan that’s important, it’s the planning.” “Plans are worthless. Planning is essential.” “Those who plan do better than those who do not plan even thou they rarely stick to their plan.” Business plans are essential, but like all plans you need to test your assumptions constantly against reality and adapt your plan along the way.
The failure of business plans, i think, is also because of “financial psychology error”. Sometimes, business owners fall in love with their plan so deeply that they don’t want to change/revise the plans to adapt to the changing environment.
You can always divide the business plan into smaller parts and try to achieve each goal. But like other people commented, a business plan is essential if you want an investor or a business loan. You can’t just walk into a bank and ask for a loan for your new business without a plan.
Hi Brendan Coram…The main reasons for business failure are lack of financial resources and incorrect business plans. To get your successful business you need expertised people who do their work according to perfect plan and systematic way.