Recently in Business Planning Category

Today is the first day of classes for me here at Belmont University.  I love the rhythm of the academic calendar.   The start of a new academic year offers a sense of renewal.  But, there is something special about this one.

As those of you who are regulars readers know, 2010 has not been the best of years for me personally.  Early in the year, my wife and I lost our oldest dog Keb, who died much too young at the age of eight.  Soon came the loss of my father to a stroke, which happened at the same time as our daughter and her husband had been flooded out of their home in the Great Nashville Flood of 2010.

While life seems to be getting back to normal, we can't help but being haunted by the ghost of "what's next?"

So the fresh start that comes with every fall semester is particularly welcomed this year.

The fresh start is also exciting to me as after many years of teaching entrepreneurs, I am in the middle of a renaissance in how I help my students learn about planning for their entrepreneurial ventures.

Unlike many of my colleague around the country, I have not completely abandoned the good old business plan.  I am simply in the process of relegating it to its rightful place.  Business plans are certainly useful tools for certain situations, such as raising funds or selling a business.

Business planning is a critical activity for any entrepreneur, but we seem to have gotten lazy and assumed that learning the process of writing business plans is the be all and end all of planning.

This laziness has included entrepreneurs, investors, and those of us who teach entrepreneurship.  We are all guilty of a misguided understanding of what is essential about planning for a new and growing venture.

Enter a small, but growing body of work on business modeling.

Business modeling is a way of conceptualizing and planning for a venture that looks at it as a whole.  Business plans, on the other hand, are much more like a series of short stories that may or may not loosely hold together.

Business modeling is all about the integrity of the planning process and the importance in internal consistency among the moving parts that make up a successful venture.

As with any new way of thinking in business, there is no clean and simple text for us to teach from.  What we are learning about effective business modeling comes from a variety of places and disciplines, each of which is shedding a little more light on what makes a successful business model.

Some of the best work out there so far includes:

Johnson - Seizing the White Space: Business Model Innovation for Growth and Renewal 
Osterwalder et al - Business Model Generation
Mullins & Komisar -- Getting to Plan B

None of these works offer a complete view of business modeling, but each offers insights on part of the process.

Well, it is time to get ready to head for campus.  More than most years, I am truly thankful for the fresh start this new semester offers.

One of the problems with business plans is that they have gotten to rigid and formatted. 

Some of this is self-perpetuating.  People look at other people's plans that have gotten funding and we see a common pattern emerge.

Some of this is due to the business plan software that is out there (here comes the onslaught of e-mails and comments from that industry!!).  People buy the software and then simply fill in the blanks.

MyVenturePad has a link to a post by Seth Godin at his blog that makes a good point about business plans:

It's not clear to me why business plans are the way they are, but they're often misused to obfuscate, bore and show an ability to comply with expectations. If I want the real truth about a business and where it's going, I'd rather see something else. I'd divide the modern business plan into five sections:

• Truth
• Assertions
• Alternatives
• People
• Money

His post is worth reading before you write your next business plan.

I tell my students to use your plan to tell a story that answers a few key questions:

1. What are you hoping to do?
2. Why is this an opportunity?  What is happening in the marketplace to make this work?
3. Specifically who is feeling "the pain" that creates their need for this product or service?  What will you need to do to get their business? 
   
4. Who will you have to fight to get these customers to buy from you?
5. Specifically what will you offer and for how much?  How will you let them know about you?  How will you deliver what you offer to them?
6. What resources and people will you need to make this work?
7. What does this story look like in numbers?

I don't need to see industry codes and other useless details.  I do not need you to snow me under with industry data that does not add to your basic story. 

Tell me a logical story that holds together.  (See my earlier posts on business modeling on how to make this happen). 

Make it a realistic story.  Make it a believable story.  Make it a story that is not an act of fiction.  And for goodness sake, make it your story.

When an aspiring business owner decides to move ahead and start a new venture, conventional wisdom says the first thing he or she needs to do is write a business plan. But research on how to plan and my own experience suggests this isn't usually very effective.

In fact, writing a formal business plan should be the final step in a three-step business planning process.

Step one is to assess your idea to determine if it is actually a viable business opportunity. Is there a large enough market? Can I charge this market enough to make a profit?

Is the concept something I can personally pull off? Do I have the experience, knowledge and access to the necessary resources to make this business successful?

This first step should not involve that much detail. It should be a quick-and-dirty first assessment of the concept.

Step two is to develop the business model. A business model adds more detail to the evaluation and begins to make sure all of the moving parts of the business work together.

What is the value that is offered to the customer and what is it worth to them? Who is my target market? What do they expect out of me as a customer? How do I get information to them and how do they want to get the product? What are the key activities to make this all come together and what will they cost? What are the resources I need to make this happen (money included)?

There is a great resource available to help would-be owners develop a business model: www.businessmodelgeneration.com. This Web site contains a large amount of free information on business modeling and links to an excellent book to guide you through the process.

Now, it's time for the plan

Step three is to write an actual formal business plan. The business plan details the elements of the business model. It helps organize what can become a complex and overwhelming array of issues.

The business plan puts everything down on paper to make sure that we have thought of all of the important "must-dos" that go into a successful startup.

Understand that the business plan is just a map, albeit a map into an unknown territory. The actual path the business takes will almost always be different from the original business plan. But the plan can help us think through the details.

It helps 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.

However, this final step of writing a formal business plan is not always necessary. I know many very successful entrepreneurs who never wrote a formal business plan for their ventures.

But almost all of them understood the importance of business planning. While they may not have written a formal business plan, they did take the time to go through the first two steps of business planning.

While a formal business plan may not always be necessary, sound business planning will always improve an entrepreneur's chances for success.

(This post ran as my column in the Tennessean this morning).

One of the joys of teaching at Belmont is that I get to keep in touch with so many of our alumni.  I offer my students a life time warranty on their entrepreneurship education, which translates into my willingness to continue to help them out on their entrepreneurial journey after they leave our campus.  We have made a policy in our program to never charge for consulting with alumni businesses and to never take an ownership stake in their firms.

I met for lunch yesterday with my former student Adam Wynia.  Adam was a member of the Belmont golf team.  His final business plan in our program dealt with becoming a professional golfer.  He has been working to implement this plan by playing the developmental professional golf tours since graduation.

Adam also is doing some golf teaching.  He is part of a program that teaches golf in a rather unconventional manner.  It is an approach that takes a rather holistic approach, focusing less on the technical details of the golf swing and more on how the body works together to get a natural, consistent, predictable swing.

The philosophy they take is that the golf swing starts with the ankles, which must work with the legs to help open the hips and get the proper shoulder turn.  The arms and hands are just an extension of the proper movement from the rest of the body.  Too many golfers focus only on their arms and hands.  It takes the whole body working together to get a consistent swing.

Adam said that by focusing on the golf swing this way, the golfer is able to focus on balance.  With the body being balanced, the body can swing naturally and consistently.

I know....this is supposed to be a blog about entrepreneurship, not golf.  But, this has been such a long winter that spring fever has hit me hard and it seems that I can't get my mind off of golf!

As I listened to Adam describe how they teach the golf swing it dawned on me that this is how I am trying to teach entrepreneurship.

The proper golf swing begins with the ankles, which provide the proper foundation needed for balance.  A new venture needs to start with a solid foundation, which comes from proper fundamental assessment of the opportunity -- Is this idea a real business opportunity? 

With a proper foundation, the legs, hips and shoulders can all work together to get the proper swing while staying in balance.  In a new venture, it is the business model that defines how all of the parts need to work together -- in balance, if you will -- to meet the needs of the market.

If you do everything in balance with your ankles, legs, hips and shoulders, your arms and hands will follow.  The result is a consistent, predictable swing.  Think of your business plan as your arms and hands -- it is the natural extension of getting the opportunity assessment and business model right, thus ensuring that all parts of the venture are working together.

Adam said that only focusing on your arms and hands will not lead to a consistent swing. 

Likewise, focusing only on the technical details of the business plan will not lead to a predictable entry into the market. 

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.