Business Plans Don’t Work

Note: I first published this article here, on Innovation Excellence. It got a bit of discussion on the site and through linkedin so I thought I’d report it here.

Business plans don’t work. Nine out of ten business start-ups, and one in six business transformations will confirm it. Learning from the failures of the past, it becomes clear that we have been missing a key step in the execution of our business plans. That key step is the discovery of what works. In this three part series, I’ll look at the way in which business plans lead to failure, the way in which business model innovation can help, and the mindset that is needed to succeed in discovering a new path towards business success.

What’s Wrong with a Business Plan?

The business plan is widely accepted as the starting point for most major business initiatives, whether they are launching a new start-up, creating a new product line, or transforming existing operations. Here’s how it works, illustrated for a start-up:

Our first problem is with the business plan itself. Without a dedicated period of validation, most business plans remain firmly in the realms of fantasy. They contain guesses about who the customers will be, guesses about what product features customers will demand, guesses about how much revenue will be generated, and guesses about expected production costs. It doesn’t matter how good the analysis is, until you have tried it out…it’s still a guess.

As an execution document, it is hardly surprising that 9 out of 10 new businesses will fail. As Steve Blank says, executing a business plan in this way is not a strategy, it is a prayer. Let’s take a look at some of the activities which are not being done:

  • The business is not validating who its customers are, what problems the product is solving, or how well the product is meeting customer needs
  • The business is not finding out which customers will actually buy the product, which distribution channels and pricing strategies work best, or whether the sales model will scale
  • The business is not revisiting the business plan in any way, or making any corrections as it discovers new information about its customers, its suppliers or the operational activity needed to generate revenue
  • The business is not controlling cash burn, or waiting to find out whether the business model actually works before committing itself to a series of execution milestones and sales targets

What are the Risks of Getting it Wrong?

It’s not just start-ups that seem to suffer from blind faith in their business plan. A quick look at the history of failed business transformations makes for sobering reading:

  • London Stock Exchange abandon moves to paperless share settlements, loss $400m (1993)
  • Denver Airport abandon automation of thir baggage handling, loss $250m (1994)
  • Levi Straus lose access to three US distribution centres for a week following the failure of its supply chain automation program, loss $192m (2003)
  • Sainsbury’s abandon a supply chain automation program, loss $564m (2004)
  • Ford Motors abandon an upgrade of their purchasing system, loss $400m (2005)
  • Federal Bureau of Investigation abandon electronic case management, loss $170m (2006)

Note that Levi Strauss and the London Stock Exchange had original project budgets of $5m and $6m respectively (yes, that is a 13,200% cost overrun for the LSE)! Far from being the exception, a recent study by Oxford University’s SAID Business School suggests that these apparent outliers are actually far more frequent than we might think. With one in six large IT projects expected to suffer a cost blow out of at least 200%, executives should brace themselves for spectacular failure on the road ahead.

The reasons for these extreme failures are varied, but typically include (i) poorly defined and evolving user requirements, (ii) un-validated delivery schedules, (iii) a lack of user involvement, and (iv)  a level of customisation which overstretches both management and technical resources alike.

To Be Continued …

In part two, I’ll look at how business model innovation and a discovery based approach can help turn business planning fantasy into business planning reality.

image credit: freelanceswitch.com

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6 thoughts on “Business Plans Don’t Work

  1. I think your over generalization of the word “Guess” makes your argument. But in all the companies I’ve worked in, we did anything but guess. If a company does a poor job of validating and researching, they deserve to fail and have their competitors take advantage of that failure.

    1. Thanks for the feedback Tim. I probably have overused the word guess. I wanted to emphasize the risk that the best analysis in the world can still be blindsided by entry into the real world. When businesses do fail it can often be because buyers failed to materialize in sufficient numbers to match their sales forecasts. That’s ok prelaunch because you can adjust the rest of the business to suit… But if investors are holding you to the business plan and it’s forecasts, and you haven’t done enough field testing to really know what customers want , then you are in trouble.

      Many of the ideas are in Steve blanks work, see Four steps to Epiphany. I have been playing with the ideas and seeing how they might work for internal business activities like transformational change

      1. I do agree with you, there is one big risk I see with someone using the traditional ‘business plan’ approach, and that is treating the document as some sort of static document. A document you create and thus check off the accomplishment list and move on to the next phase of a greater scheme. In this setting, your approach of the Innovation Business Model would solve many of these problems.

        I can’t tell you how many small business prospects I’ve asked to show me their ‘business plan’ and they (if they have one) show me the document they used to secure their initial loan or seed money, sadly created many years ago.

  2. Well if that business plan don’t work you should always have a plan b what you should do,do i still need to survey,before submitting the business plan you will always ask your self it is 100% sure to avoid some mistake..Anyway i learn a lot thanks 🙂

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