Business Planning for Entrepreneurs

We are all told that we need a business plan, but do we? Is this corporate-world tool still relevant to entrepreneurs wanting to exploit their opportunity in the 21st century? Entrepreneurial educators the world over, including me, have built their courses on the premise we do and there is no shortage of books and consultants prepared to take our money in order to deliver one. Business planning is essential but is the Traditional Business Plan the right tool or is it actually counter productive?

Introduction - Business Planning

It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage, than the creation of a new system. For the initiator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders in those who would gain by the new ones A quote by Niccolo Machiavelli (1469) sets the stage in this age for an article that I am sure will emulate all the emotions he has identified above. [1]

A study of 116 ventures conducted by the professors Julian Lange and William Bygrave from the highly respected entrepreneurial school in the US, Babson College, concluded that there is no evidence linking the performance of a new venture to whether it was based on a written business plan or not [4]

Business Plans - http://www.wordle.net/

Planning, the pillar underpinning any successful endeavour is not under attack here. What is under attack is the way in which one method, the traditional business plan, is promoted as the only authorised version that should be adopted regardless of the enterprise status or development. So, the argument is not about enterprise planning - that is accepted by entrepreneurs as being essential. The question being put is whether entrepreneurs should write a formal business plan using the traditional educational and business model that is promoted by most educational institutions and consultants.

So what is the traditional business plan. There are many and a google search will reveal. One example that provides assistance in the writing of a traditional business plan can be found at the US Government's National Telecommunications and Information Administration web site. [5] Their suggested outline of a traditional business plan includes;

Saras D. Sarasvathy

Saras D. Sarasvathy - Effectuation.org

Effectual reasoning needs to be highly creative and requires as core competencies - imagination, spontaneity, risk-taking and salesmanship. Effectual reasoning reverses the norm in that it promotes 'ready - fire - aim'. Effectual reasoning develops the meaningful picture and the compelling story and then through execution allows the surprise discoveries to shape the clearly achievable and desirable goals. Effectual reasoning focuses more on affordable loss not on expected return, on strategic partnerships not competitive analysis and on turning the chance happenings to advantage over exploiting pre-existing knowledge.

Where causal reasoning goes to great lengths to avoid surprises, effectual reasoning embraces it. Causal reasoning attempts to predict the future in order to control it whereas effectual reasoning attempts to control the future thereby negating the need to predict it. For business planning to be effective for entrepreneurs it needs to adopt the effectual approach to problem solving and not simply adapt the causal approach that whilst useful for existing enterprises, it is not appropriate for entrepreneurs exploring the unpredictability of new products in new markets.

The following factors also contribute significantly to the inadequacy of the traditional written business plan as a planning tool for entrepreneurs;

1. You can't research new - The foundation stone for the traditional business plan is market research but most new opportunities for entrepreneurs are created in worlds characterised by great turbulence and considerable change. Consequently, it is extremely difficult to do business planning research on fast changing and evolving markets. There is just not any meaningful data in these markets which leads entrepreneurs to value the trial and error' (effectual) approach far more than the goal, research and analysis approach required of a traditional written business plan.
2. Change is inevitable - Experienced entrepreneurs know and accept that entrepreneurial business enterprises change and morph substantially in the foundation stages until they eventually settle on their sustainable growth path. They know and accept that a percentage of their plan will not work but it is impossible for them to identify in the planning phase which parts these will be. They know that there are just too many variables in resources, market acceptances, product developments and the entrepreneur themselves to predict meaningfully in detail over the traditional 3-5 year business plan. Entrepreneurs rely more on their ability to adapt to the changing environment as it evolves than carrying out the detailed instructions of an operational plan fundamentally created in ignorance.
3. Windows of opportunity close quickly - Entrepreneurs know better than most that timing is everything. All opportunities have a trigger point where action and commitment is required for that opportunity to be exploited. They know that windows of opportunity' are fleeting and require timely action or they can be lost forever. They believe that the cost of devoting scarce resources to researching and writing a traditional business plan is greater than the any benefit received, particularly if a first mover advantage' in the marketplace is lost due to this usually 3-6month delay.
4. The plan is already in play - Over 70% of successful entrepreneurial enterprises are started by current domain experts who have directly experienced the pain of a particular problem for which they have come up with a solution. This experience usually occurred while working for someone else or with a previous employer. These entrepreneurs question the need or value of writing a traditional business plan and are more likely to use their insider knowledge and experience and strategic alliances to firstly evaluate the opportunity and then to take it to market via their highly accessible distribution channels.
5. Planning tools should not be so ridgid - The traditional business plan presents as a 'one size fits all'. How many entrepreneurs have struggled with the templates asking question about the past performance of the business or the current status in terms of operations. The traditional business plan has a bias towards an existing business going forward and is not well structured for an 'idea whoes time has come', as it is for most entrepreneurs.
6. Getting it wrong is no great loss - The advent of the internet as a means of business entry has made the cost of being wrong almost negligible. Through the medium of eBay, on-line marketing and the like, products and services can be tried and tested in the real world' prior to any significant commitment of resources. This allows for the process of modification and adaptation of the business model to meet the market needs on the fly' and so creates a far more commercially proven business plan (proof of concept) than the traditional generally untested written ones. These entrepreneurs focus on an affordable loss approach rather than get carried away by the 'blue sky' estimates of traditional business plans.
7. Its a bad sell strategy - Imagine the photocopier sales person trying to make a sale by placing the 100 page manual on the desk of the prospective buyer and standing back waiting for the cheque. Adopt this approach with your traditional business plan and you and the photocopy sales person are going home the same way - empty. Think about the last time you purchased anything of note; How much information did you need before you parted with your money? What were the key issues you wanted resolved before you purchased? What aspects triggered your confidence to make the purchase? The answers to these questions will guide you in deciding the level and style of planning and presentation you should adopt for your new venture.
8. It proves nothing - Well, it does prove that you can prepare a good traditional business plan, but what about preparing what is really important - a good cashflow. As a proof of concept tool, there are far more convincing methods that you could adopt. (A web site collecting email adresses of interested buyers for you product, a prototype already in the market under limited release, customer lists and testimonials, embedded release with a key strategic partner, customer and supplier support).

Guy Kawasaki - The Art of the Start

In Guy Kawasakis opinion most business plans are "a piece of [rubbish]". He describes them as "sixty pages long, fifty-page appendix, full of buzzwords, acronyms, and superficialities". Guy Kawasaki recommends writing a short business plan of about 20 pages but only after first perfecting a pitch based on a slide presentation: "Give the pitch a few times, see what works and what doesn't, change the pitch, and then write the plan."

Getting going for him is all about implementation - "building the prototype, writing the software, launching the web site or offering the services". He goes on to say that "The hardest thing about getting started is getting started ... Remember: No one ever achieved success by planning for gold". Click here to read a manifesto of the book The Art of the Start

1. First timers - if this is a first time venture into the world of entrepreneurial endeavour then it is could be useful for the novice entrepreneur to go through the process, in theory at least, of developing a commercial idea and taking it to market. The traditional written business plan does guide a forced thinking of all the elements that make for a sustainable business and can provide a vehicle to secure feedback from experienced operators to find weaknesses, opportunities, unsupportable assumptions and over optimism contained in the plan. However, the danger is that the new entrant, instead of gaining the confidence to act, will actually imbibe the old adage of paralyses by analysis.' The other danger is that there is so much emphasis placed on writing the traditional business plan for new entrants that creating the perfect business plan becomes an end in itself rather than creating what is really needed - the perfect cashflow.
2. Stakeholder requirements - As mentioned earlier, external stakeholders may expect it. These stakeholders may be bankers, Government Agencies, joint venture partners, silent partners/angel investors, mentors/advisors, key employees and even family & friends. Where a significant capital outlay is required by these external stakeholders then a traditional written business plan is considered mandatory in order to gain a sustainable advantage over others in securing capital and assets. However, I would argue that there are far better planning models but sadly this group of stakeholders are more likely to favour tradition over better. Anyway, entrepreneurs tend to start their enterprises very small with the means close to hand moving directly into action without elobarate planning. So, they have no need, in the early stages as least, for external stakeholders that are not part of the entrepreneur's social and professional networks.

In continuing the research done by Professor Amarnath V. Bhide, various other authors and entrepreneurial advisors world wide are beginning to promote the concept that the traditional written business plan is no longer a prerequisite to obtaining investment financing or succeeding in the entrepreneurial world.