Business Planning: January 2007 Archives

I have had some interesting discussions with a entrepreneurs the last 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. Just because you present a specific business model in your plan, it is no guarantee that it will actually look anything like what you thought it would once it gets going. 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 make significant changes to your product or service. While the plan may give you a path to launch your business, the market will tell you how to proceed from there.

Successful entrepreneurs are not necessarily that good at crafting the initial business plan. What they are good at is listening to the market and listening to their customers. They will tell you what your business should really look like if you'll just listen.

Don't be arrogant and stubborn about your vision. 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 their needs. They 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 will make the business stronger. They want you to make money -- not to follow the plan as it was originally written. They expect you to listen to the market and adapt.

In most cases the original opportunity for your business came about due to changes in the market. So continue to listen to the market and it will tell you where to take your business over time.

Change is the one constant in today's economy.

Stay nimble. Stay flexible. Continue to adapt. And listen!

A marketing plan is so much more than simply a list of promotional tactics to be used to sell your product. While how you plan to promote your business is important, the marketing plan should explain all of the strategies you will use to build relationships with your customers.

Marketing plans consist of what is commonly called the "4 P's": Product, Pricing, Promotion and Place (distribution). When building your marketing plan you should address how each of these will improve your chances of attracting customers to your business.

We look at product because we need the customer to tell us what they really want from us. We may have developed our own thinking about this, but what we think does not really matter. I work with many artists through my position here at Belmont -- musicians and visual artists are common in our program. I tell these artists that if they want people to pay for their art or their music that they will need to adjust their skills and gifts to meet the needs and wants of the market. But, that lesson is not just for artists. It is for all entrepreneurs. We have a notion of what we think the market wants when we open our doors, but in almost all cases the market begins to immediately give us feedback that tells us what they truly want. What they want may force us to make a minor adjustment in what we offer, or it may take a major rethinking of our business concept. If we are not ready to adjust to the feedback from the market, our chances of success fall dramatically.

Pricing is the next key part of the marketing plan. What we understand what the market wants in our product, we now have to price it at a level that the market is willing to pay. Most often an entrepreneur will set the price relative to the market. The most common mistake I see is pricing the product or service too low. Price is part of what communicates quality to the market. If you price lower than everyone else, that may send a message of inferior quality to all of those potential customers. I refer to this as "apologizing to the market."

Place tells how we get the product or service from us to the customer. Will we use distributors, retail outlets, our own retail stores, the Internet, door to door sales, kiosks, or some other means to get the product into their hands?

And finally there is promotion, which tells how best to communicate our product, its price and how they can get it, to the market.

Now here is a final step in market planning that many overlook. There is another part of the business plan that should tell the same story as our marketing plan -- our revenue forecasts. Revenue forecasts should never be made by guessing or simply plugging in some numbers that look reasonable. Rather, the revenue forecast should, in numbers, tell the same story as the marketing plan. Why? Consider the simple formula for Revenues:

Revenues = Price X Quantity

If we do a good job in our marketing plan, and use real information we derive from real customers (or potential customers), it should help explain our assumptions for those two seemingly simple variables -- price and quantity. A well developed marketing plan will tell us why we think we can charge a certain price. It will also help us explain why and how we intend to sell a certain number of units by giving the customer what they want (product), how we will get it to them in a manner that will make it easiest for them to buy it (place), and how we know they will be aware of all of this information (promotion).

Why do we write business plans? What purpose do they serve?

Guy Kawasaki had a post yesterday on a recent study by Bill Bygrave from Babson suggesting that business plans are highly overrated. And to a large degree, I agree. (Guy as a link to a Word Document version of this study at his post about this study).

Now before all of my students throw up their hands in joy over this statement, I need to explain further. For while I think too many entrepreneurs spend way too much time on their business plans, many of these same entrepreneurs do not spend enough time on actual business planning.

Let's look carefully at Prof. Bygrave's summary of his conclusions from this study:

The analysis revealed that there was no difference between the performance of new businesses launched with or without written business plans. The findings suggest that unless a would-be entrepreneur needs to raise substantial startup capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan before opening a new business.

That is only true if would-be entrepreneurs have done all of the homework that goes into writing a sound business plan. I know for a fact that the population Bygrave surveys in this study (alumni of Babson) get very good training in new venture analysis and planning. So his subjects all should know how to use these tools in preparation to launch their ventures. It really doesn't matter if they actually go the final step and write it down in a formal business plan.

Business plans are a way to document sound analysis and good planning of your new venture. Whether you actually write this document is to a large degree irrelevant. What does matter is that you go through the process of evaluating the market for the venture, analying the potential profit margin it can produce, and reflect honestly on your personal readiness to make it happen. So it is the process of planning, not the actual plan, that really matters.

So why do I have my students write a plan at the end of their studies? It is basically a final exam in their last class with us to show that they understand how to analyze and plan their new venture. Too many people think that a business plan is the beginning, middle and end of starting a new venture. The business plan is simply a reflection of a sound process -- it is not the actual process.

In reality, investors like venture capitalists use it in the same way. They want evidence of sound analysis and planning, and the business plan is a way to capture the work an entrepreneur has done in these critical steps.

Guy Kawasaki has it right in his conclusion about this study:

However, don't draw the wrong conclusion from this study: "Analysis, planning, vision, and communication are unnecessary." This isn't true. What is true is that a business plan should not take on a life of its own. It is a tool -- one of many that may help you get funded (or, more accurately, hinder you from getting funded if you don't have one) and may help you get your team working as a team. But it is not an end in itself.

So to all of my students this semester -- get back to work on your business planning!

(Thanks to Bruce Schierstedt for passing this along).

An entrepreneur's vision should communicate what her business can become. It paints a clear and compelling picture for employees, investors, suppliers, and other stakeholders of what they are buying into at a time when the business has little or nothing to show. But to be complete, this vision should describe more than the product the business will make and market it will serve. It should also paint a picture of how the entrepreneur intends to conduct herself as she starts and grows her business.

The entrepreneur's values should also be reflected in her vision for the business. How will she conduct herself as she starts and builds her business? How does she want to treat her employees? How does she want those employees to treat the customer? What are the principles that will shape how her employees act in her business?

The values she brings to her business should be the same values that guide her life outside her business. This is what creates true integrity in her life. Each action in her business will shape her character. The opportunities she pursues, who she chooses to do business with, who she hires, how she treats each stakeholder of her business, all develop her character just as much as her actions in her family and in her community.

So her vision will not only guide her business strategically, but also guide the development of its culture. And it will also help shape who she becomes as a person.