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In Defence of Business Plans

The Fortune Tellerphoto © 2010 Louise Docker | more info (via: Wylio)

I think business plans get a bad rap. There’s a movement out there that says that business plans are a waste of time because they can’t accurately predict the future. For this reason, these people will tell you to not bother doing one. They’re missing the bigger picture.

It’s true that the future is very difficult to predict. Nassim Nicholas Taleb makes this point very effectively in his book, The Black Swan. However, being unable to accurately predict the future does not mean that it is a waste of time to think about how you are going to approach a situation, given the best information available at the time.

Business planning has a lot of value as a thinking exercise. I’ve seen lot of situations where business owners doomed their business from the beginning because they did not bother to plan out their idea. They made mistakes that could have been avoided if they had been discovered in the planning stage. Sixty percent of all businesses fail before the five year mark. A considerable number of these failures were destined at the outset because of major flaws in their business models.

I think business plans have a bad reputation with some people because of some high profile failures where the management team followed the business plan to the letter without considering changed circumstances on the ground. One such failure was recently documented in Steve Blank’s excellent blog post about Iridium. The company had a long product development cycle and did not take into account a changing competitive landscape. They stuck to their original plan destroyed $5 billion of shareholder value.

By it’s very nature, a business plan needs a feedback loop. As new information is obtained, the assumptions used in the business plan need to change to reflect the new reality. A big enough change might require a new strategy to be successful. This is why venture capitalists will tell you that given a choice of funding an excellent idea with a weak team or a weak idea with an excellent team, they will fund the better team. The strong team will be better able to adapt to changing conditions and modify their original business model as needed.

Iridium could have had a better outcome if they would have made adjustments to their plan as reality started to change around them. If they would have followed Steve Blank’s customer development process they would have undoubted been better off due to the feedback loops he has built into his model. It wasn’t the planning that killed Iridium, it was following the original plan right off a cliff.

Comments on this entry are closed.

  • Ajeva November 23, 2010, 8:46 am

    I think that there are a few ( expensive ) geniuses out there who can predict what the future trends in business is like some modern soothsayer. But having no plan is worse than having a plan that’s 50% successful. Sometimes, you just have to trust your intuition and go for what you think is best. Besides, business is all about risks, and overcoming the fears.

  • ScottK November 23, 2010, 5:07 pm

    I agree. Business involves risk taking. A good business plan will make it a calculated risk instead of a blind gamble.