The business planning conundrum

Sep 02 2010 by John Mullins Print This Article

Planning is important. But results are what count. So why is there so much fascination with business plans in today's entrepreneurship community and in the innovation units of big companies? Why are there dozens of books titled something like 'How to Write a Business Plan'? Why are there numerous software packages to automate the business planning process? Why do most leading business schools offer courses in which teams of students write business plans for proposed new ventures?

The Problem and a Solution

The vast majority of business plans raise no money. Of those ventures that are financed, many - if not most - will fail. The simple fact is that most business plans should never have been written, and most with any merit are written far too soon, before there's any real evidence to support their assertions. So, why are so much blood, sweat and tears invested in labouring over the perfect business plan? Good question.

"Is there a solution to the business planning conundrum," you might ask. Indeed, there is. Instead of diving into business planning mode, step back and ask yourself whether the opportunity you have in mind is genuinely attractive.

That's what an aspiring entrepreneur in the UK named Cassian Drew did before embarking on a plan to sell climbing wall hardware and exercise programmes to fitness facilities. He spent a summer examining his opportunity and, in the process, learned exactly how fitness operators assess the economics of the gear they acquire.

Alas, it quickly became clear that the economics underlying what he had thought to be a great idea just weren't going to fly. While he and his partner were well suited to the opportunity and the market was attractive – with booming interest in both fitness and climbing – there simply wasn't a business model that would work.

As Cassian Drew and countless numbers of entrepreneurs have learned, usually the hard way, opportunities are best understood in terms of three crucial elements: markets, industries, and the one or more key people that make up the entrepreneurial team.

The seven domains model articulated in my book The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan brings these elements together to offer a clearer way to answer the crucial question that every aspiring entrepreneur must ask him- or herself every single morning: "Why will or won't my idea work?"

The model offers a better toolkit for assessing and shaping market opportunities and a better way for entrepreneurs or entrepreneurial teams to assess the adequacy of what they themselves bring to the table as individuals and as a group.

The model also provides the basis for what I call a customer-driven feasibility study that entrepreneurs, whether in nascent start-ups or deep in the bowels of an established company, might use to guide their assessments – before they invest precious time and effort in writing a business plan.

The Feasibility Study and the Business Plan: How Are They Different?
So how do the seven domains model and the customer-driven feasibility study it delivers differ from what's in a good business plan?

To be sure, there is considerable overlap in the content of a customer-driven feasibility study and a business plan. And that's actually a good thing. In fact, all of the analyses we advocate are essential, though not sufficient, for crafting a thoughtful, evidence-based business plan. So, what's new here? What's different from a business plan?

Customer focus: The feasibility study is focused on the customer. As Peter Drucker wrote many years ago, the purpose of any business is to win a customer. The feasibility study hones in on that purpose, one quite different than that of most business plans – which is to win an investor. But without the likelihood of there being customers, there will be no investors.

Economic fundamentals: The feasibility study succinctly addresses the fundamental economics of the business, by identifying the key drivers of cash flow: revenue, customer acquisition and retention costs and timelines, gross margins, required capital investment, and the working capital characteristics of the operating cash cycle.

If these drivers are satisfactory, detailed strategies – for marketing, operations, and financing – can probably be developed to make the venture economically viable, provided the market, industry, and team elements are sufficiently attractive. If they are not, there's little point in wasting time developing such strategies.

Mindset: The customer-driven feasibility study asks the critical questions necessary to satisfy the entrepreneurial team's curiosity about the attractiveness of the opportunity itself, and makes it possible to answer these questions before developing the detailed strategy necessary for the completion of a business plan.

Thus its mindset is to ask (and answer) questions, not to sell the venture's merit. In contrast, the business plan organizes the answers delivered by the feasibility study and goes on to develop marketing, operating, and financing strategies in an effort to sell the opportunity, in a sharply focused way, to investors and other stakeholders.

Why Bother?

"Are these differences worth the effort?" you might ask. Why shouldn't you, as a would-be entrepreneur, simply skip the feasibility study and proceed directly to preparing a business plan?

First, researching and preparing a customer-driven feasibility study gives you a chance to opt out early in the process, before investing your precious time and energy in preparing a complete business plan. Thus, it can save weeks or months of time that might be wasted on a fundamentally flawed opportunity.

Second, for opportunities that do look promising, the feasibility study jump-starts the business planning process and provides a clear, customer-focused vision about why your proposed venture makes sense – from market, industry, and team perspectives, viewed independently and collectively. It identifies the customer pain, how you'll resolve it, and the one or two domains that make the opportunity stand out. These factors become the drivers of your business plan.

Third, by ensuring that all aspects of the opportunity are examined, your analysis reduces your risk of entering a fatally flawed venture.

No car-buyer would buy a new car without a road test, and that's a far less risky decision than the one you are about to make. A customer-driven feasibility study is the entrepreneur's new business road test. Entrepreneurs who proceed without doing one ignore it at their peril!

About The Author

John Mullins
John Mullins

John Mullins is an associate professor of management practice at London Business School and author of "The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan," third edition 2010.