Recently in Business Planning Category

I have tried a different approach to business planning with my students this semester.

While I have defended business planning in the past, I also recognize that it is often not used effectively.  People rush into planning without making sure they are writing a detailed document about something that can actually make it in the market.  I also see that people who move into writing a business plan too quickly can get lost in the details.

It is this second issue that has led me to add a new step in business plan development for my students (and with the alumni I work with, as well).

I have integrated a step between the cursory opportunity assessment process and developing a full business plan.

The step is based in large part on the ground breaking work of Osterwalder and Pignuer on business modeling.  It has proven to help them see how the moving parts of the business fit together and work (or don't!) before they dive into the details of planning. 

Here is the assignment (this can serve a s good outline for anyone planning a venture):

1- Mission Statement (25 words)
2- Business Concept (1 page max) - 5%

• Additional description of the concept beyond 25 words in mission
• Key values entrepreneur brings to the business
• Key goals and objectives, including personal financial and non-financial goals

3- The Value Proposition (2 pages max)

• Based on industry research, why is this an opportunity?
• What are the macro trends that support this opportunity?
• What are the more focused localized trends that tie into industry trends above?
• What is the "pain" in the market does the business address?
• Cite evidence to support

4- Target Market (1 page max)

• Who are they?
• Why are they your target?
• What are the key attributes that drive their decision to purchase?
• Who are your main competitors and how well do they address customer preferences above?
  

5- The communication and distribution channels (1 page max)

• Where do your customers get their information to make a purchase decision?
• What form do they prefer this information in?
• How do they want you to get the product or service to them?

6- The relationships established with clients (1/2 page max)

• How important is customer service in the business?
• Do we need to deal with each customer on a personal basis?
• Do they just want us to get them the product and leave them alone?

7- The key resources needed to make the business model possible (1 page max)

• People - estimated cost for each
• Equipment - estimated cost for each
• Inventory - how much to start and how much on hand (if applicable)
• Physical space
• Operating cash on hand
• Suppliers

8- Key Activities (1 page max)

• What are the "must do's" to get this ready to launch (Feasibility Plan)?
• What are the "must do's" to get the first customer (Feasibility Plan)?
• What are the "must do's" to keep customers coming in the door and to keep them from leaving us?
• What are the "must do's" to support growth?

9- Key Stakeholders (1 page max)

• Who are your most critical stakeholders and what will get them to work with you?  (This included sources of outside funding, if needed!)

10- The revenue streams (1 page max)

• What generates revenues for the business?
• What will pricing strategies be?
• What is our pricing structure?

11- The cost structure (1 page max)

• What is the cost per unit?
• What is the overhead cost to operate?

12- Breakeven  (One sentence max)

• When will we breakeven based on these initial estimates?  (More precise figures will come in the business plan)

I was sent a post about business plan competitions written by Lora Kolodny from the You're The Boss blog at the New York Times over the Holidays.

It poses a question that we really know very little about -- are business plan competitions a good or a bad thing?

Kolodny offers a variety of opinions on the topic from various academic-types, but does not draw a firm conclusion.

Here is my take.

I think business plan competitions serve some useful purposes:

1. They force entrepreneurs to carefully think through their plans.  Knowing experts will scrutinize their business models and financials forces entrepreneurs to take a few more important steps to validate their business plans assumptions.
2. They give entrepreneurs experience in selling.  Whether it is to a panel of judges, a group of investors, or that first customer, business plan competitions put the entrepreneur in the position of having to see their product or service to a skeptical audience.  The more practice at selling the better!
3. They expose the entrepreneurs and their ideas to a wider world.  I have seen many an entrepreneur connect with people who eventually help them with money or a wider network through participation on plan competitions.
4. They can put some badly needed cash in the bank accounts of start-up ventures.  Joe Keeley, one of my former students, funded much of his start-up period of College Nannies and Tutors through the prizes he won in various business plan competitions. 
   

There are some downsides to business plan competitions, however:

1. Some entrepreneurs get so wrapped up in competitions that they take their attention away from what needs to be done to create a successful launch.  In some it is as if they see winning competitions as the purpose of the business.  It is not unlike entrepreneurs who get too fixated on raising money and not building cash flow through sales.
2. Business plan competitions can also create too much emphasis on the plan itself.  While I am not one who thinks business plans are unimportant, I do think that we worry about the finished plan all nicely bound with a pretty logo on the cover more than planning process, which in the long run is what really matters.  By only working toward a really killer plan, we can create a static document.  New ventures are dynamic and so should the process of planning that supports their creation and the management of their growth.
3. Competitions can also create a short-term mentality tied simply to winning the competition, rather than the long-term focus on building successful businesses that create jobs and wealth.
   

Are business plan competitions overemphasized?  Yes.  But, I will continue to encourage my students to compete in business plan events. 

However, for our students business plan competitions are only one small part of a much more comprehensive set of activities and experiences that will better prepare them as entrepreneurs.

(Thanks to Tom Swartwood for passing this along).

I mentioned a resource a few days ago to help entrepreneurs improve their business models.

Here is another great resource:  Getting to Plan B by John Mullins and Randy Komisar.

My column in this week's in the Tennessean addresses the imperative of staying nimble in the market and listening to what it tells you about your business:

I have had some interesting discussions with some accidental entrepreneurs the past few days about what I call "business plan paralysis." Never make the mistake of being a slave to what you have written in your business plan.

We enter the market with a plan in hand. It is a plan that we may have agonized over for weeks, months, or even years. We have done our research, created a carefully thought-out marketing plan and operating plan that help justify our financial forecasts.

And then a funny thing happens. We assumed that the market wanted "A." But if we listen carefully, we often find out that it really wants "B."

When you first launch a business you should be ready to dance with the market. And you should be ready to let the market lead this dance. Think of your business plan as simply the ticket to get you into the dance. While the plan may give you a path to launch your business, the market will tell you how to proceed from there if you just listen.

Even though you present a specific business model and lots of details on how you think your business will operate in the initial business plan, it never looks exactly like you thought it would once it gets going. Sometimes your business may bear no resemblance to the picture you painted in your plan.

You may need to adjust your features or services, change your pricing, change your distribution strategies, alter your staffing plans, widen or narrow your target market, or even fundamentally change your product or service.

The most successful entrepreneurs are not necessarily those who write the best business plan. What successful entrepreneurs are good at is listening to their customers and then adjusting appropriately.

The market will tell you what your business should really look like.

Learn to be humble

Don't be arrogant and stubborn about your vision and your original business plan. Let it evolve and develop according to the feedback you get from the market.

Don't assume that you'll look like a failure or a fool to your customers for having to adjust the direction of your business. The market will be happy that you are better meeting its needs. Customers will be glad you listened.

Don't worry about what investors might think about your need to adapt to market information. Keep them informed every step of the way. They will be impressed with your management skills and support you as long as what you are doing makes the business stronger.

They want you to make money -- not to follow the plan as originally written. They expectyou to listen to the market and adapt.

The dance with the market never really ends. Markets are dynamic, so you need to be ready to follow where it leads. Stay nimble. Stay flexible. Continue to adapt. And listen.

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I just got back from the annual Global Consortium of Entrepreneurship Centers conference held this year at Rice University in Houston.

Once again this year I heard a lot of chatter about business plans.  Many who teach entrepreneurs now question the utility of teaching our student using business plans.

My take?  I think one of the biggest problems is not business plans themselves, but how people use them, when they write them, and most importantly how they develop them.

This week's question for Forbes magazine's America's Most Promising Companies initiative comes from Brett Nelson, Entrepreneurs Editor at Forbes:

Small companies must get creative to survive the recession---even going so far as to branch into new lines of business (assuming they have the cash to do it). But mission creep comes with serious risk. What are some tangible do's and don'ts about expanding your product line?

Why should a small company change their product line?  For only one compelling reason -- the market is taking them there. 

Entrepreneurs typically rely heavily on their business plans when the time comes to launch their new venture. It is a plan that they may have agonized over for weeks, months or years. They have done their research, creating a carefully thought-out business that justifies their financial forecasts. But then a funny thing happens. They assumed in their business plan that the market wanted "A." But if they listen carefully to the customer, they often find out that the customer really wants "B."

I call this learning to "dance with the market." And you should be ready to let your customers lead in this dance.

The need to listen to the market never really ends. Markets are dynamic, so you need to be ready to follow where they lead, particularly during times of rapid change and turmoil in the market as we are experiencing with the recession.

What should you be cautious about when it comes to adjusting your mission?

Don't move so far off of what you are known for that you lose your customer base.  There may be opportunity beyond the boundaries defined by your mission, but these opportunities may end up redefining your business so much that you confuse the market.

This week my Tennessean column looks at the link between a strong marketing plan and more accurate revenue forecasts:

Making accurate revenue forecasts is the single most important step in developing a credible business plan.

Missing the mark on revenues can be catastrophic.

If sales fall significantly short of the forecast, a business can fail because of lack of adequate cash flow. And if sales wildly exceed forecasts, the business may not be prepared to meet customer orders in a timely manner.

Forecasting revenues can seem like an overwhelming task. Entrepreneurs often feel like they are trying to look into a crystal ball that is just too cloudy to see clearly. But rather than do the work that is necessary to improve their revenue forecasts, they take shortcuts.

They simply plug in numbers that have no real basis in fact, often simply putting in enough revenues to give them the profits they hope to achieve.

Fortunately, a well-developed marketing plan, which is the core of a business plan, can significantly improve the odds that revenue forecasts will be on target.

Keep in mind that revenues are calculated with a simple formula: price times the number of units sold. A good marketing plan will give you insight into the two basic numbers in this formula.

First, study the market

One of the questions addressed in a marketing plan is pricing. For most new businesses pricing is dictated by the competition.

Entrepreneurs need to set a price that puts their product squarely where they want to be when compared to the existing competition.

Closely matching existing prices says to the world, "We are as good as the rest."

If the customer wants even more features or services, a premium price can be set.

The marketing plan also should help forecast the other half of the revenue formula -- how many units will be sold. First, learn the size of the target market for the business.

Then conduct thorough market research to figure out what customers want and how well the competition is meeting those needs.

Finally, the marketing plan should explain how the entrepreneur plans to use personal selling, publicity and advertising to reach the customers and give them the information they need to make the decision to buy.

Taken together, this information brings into focus a more realistic estimate for potential sales.

When investors and bankers read business plans, they read the marketing plan first. And as they do, they will flip back to see if the revenue forecast tells the same story in numbers that the marketing plan tells in words. If the revenue forecast and the marketing plan do not tell the same story, they will read no further.

My MBA students just finished up presenting their business plans last evening.  Here are some lessons they learned about why the process of business planning is so important (beyond the obvious external reasons tied to financing):

• Business planning helps finds the things we don't know about the details -- attracting customers, staffing, managing inventory, and so forth.
• Business planning tests your desire, your passion and your resolve.
• Business planning helps to determine if all potential partners understand their roles, the time and financial commitment required, and the risk.  It allows us to discover important points of disagreement or incompatibility before it is too late.
• Business planning can show us the true potential of the business -- sometimes this is a pleasant surprise and sometimes it is a real disappointment.  If approached honestly and diligently, it is a true process of discovery.
• Business planning lays bare the holes in your business model, your team, available resources, and your implementation plans.

When I meet with prospective students and tell them about all of the cool features of our program, they inevitably ask me one question: "OK, but are you going to teach me how to write a business plan?"

We set business plans up on a pedestal as if it is the holy grail of entrepreneurship. Just look at BusinessWeek.com's most recent special issue on entrepreneurship -- it is all about business planning. The articles in this special edition include:

"The Right Business Plan for the Job"

"Before You Write a Business Plan "

"Slide Show: The Best Business Plan Tools"

"Video: What the Business Plan Expert Knows "

"How to Write a Winning Business Plan"

"Building a Better Business Plan "

"How to Win a B-School Competition"

It is as if we are telling aspiring entrepreneurs that once they unlock the secrets of the business plan, the world of entrepreneurial wealth will come pouring out at them.

Sorry, but this is just not true.

On the other hand, there is now a debate raging as to whether we should even teach entrepreneurs about business plans. a growing number of experts now fundamentally question whether business plans even matter. It seems that some data suggests that business plans have no impact on the overall success of entrepreneurial ventures.

All of this -- and I mean both sides of this debate -- is missing the point.

Are business plans all you need to know to unlock the door to success? Of course not.

Is writing a business plan a complete waste of time? Also, not true.

So why do we teach about business plans? It is because they are a way to help organize what can be a complex and overwhelming array of issues. It is because it forces us to integrate our marketing plans, or operating plans and our financial plans into one, coherent story. It is because we need to put it all down on paper to make sure that we have thought of all of the important stuff that goes into a successful start-up. It is because business plans have become the standard for communicating about a business to those with money.

Will a formal business plan make you richer and more successful? Probably not. I know many entrepreneurs who never wrote a formal business plan for their ventures who have made a lot of money. But they all understood the importance of business planning. They just never took the final step of writing it down. While the business plan itself may not always be necessary, effective business planning always is.

Understand that the business plan is just a map. It is a map into an unknown territory. Our actual path in our business will likely look very different than our plan. But the plan got us thinking. It made us think about all the details. It helped us understand how all of the parts of a business fit together to make a whole venture. It helps prepare us for our journey and makes us better prepared to adjust to all of the surprises that we will face almost every day we're in business.

Success will not be determined by the plan. Success comes from implementation.

On every golf hole I always start with a plan of how I should play the hole. Then I actually hit my shot. The wind may change direction. the ball might take an unexpectedly bad hop on the ground. Or -- and this is most likely -- I just don't hit the ball the way I had planned and hoped. So the way I actually play the hole changes with the reality of each shot based on my execution and based on the uncontrollable events that are a part of any activity -- be it golf or be it building a business.

But I still plan. I just know that I will have to adjust my plan each step along the way as I begin to implement it as I start and grow my business.

According to our original business plan, I would probably just now be exiting our health care business. But the exit ended up happening about twelve years earlier than we had thought. As carefully as we plan, the same change that creates the opportunity can lead us in unexpected twists and turns.

A great example of this can be found in the story of Chipotle told by its founder Steve Ells in a recent issue of Time.

After two years, I started to have thoughts about opening my own restaurant--a large-scale place, a "fancy" restaurant. But the economic side of the business was daunting. Knowing that many restaurants fail within a few short years of opening, I wanted some sort of backup, so that's where the idea for Chipotle came. It wasn't intended to be my main focus but a cash cow that would help position me to open a full-scale restaurant.

They now have hundreds of restuarants located all across the country. Plans do indeed change....

(Thanks to Sarah Brown for passing this along).