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Artwork by Pia Ana Ugarte.

RIP: The Business Plan

Don’t create a business plan when all you have are assumptions. Build a business model instead.

by Peter Paul Cauton Posted on Jan 7, 2013

When I started my first business, I relied on what I learned in the University: “Build you business plan first.”

So with my business idea in mind, I went to work on my business plan. I had my 5-P’s, my five-year sales forecasts, my market size estimates, a comprehensive SWOT analysis, my mission-vision statements. I crammed everything I learned
from my business courses.

After a week or two, I had a 100+ page business plan obra maestra! I then gave it to potential investors, potential partners, and business people whose opinion I valued.

None of them read it. All of them read just the two-page summary.

Heck, I didn’t read it. All that work, and I never felt the need to go back to consult it or follow what I wrote there.

In fact, it was only after around two to three years of running the business that I found it once again while cleaning out my table. I read it and cringed. Almost everything was just… off. It was 100 pages of wrong assumptions and wishful thinking.

 

You’re actually guessing, not planning

For bigger, more established businesses, a business plan may prove to have value. This is because in an established business, most assumptions are already proven. You already know in an established business that if you do A it will result in B. So you can safely assume, for example, that an increase in A will result in an increase in B. This makes it possible to try to forecast and plan.

But for a startup where everything is the first time? Everything is a guess, an assumption.

My 5-year sales projection? A guess.

My target market? A guess.

If my product will actually get bought? A guess.

The crucial thing to remember is, almost all these guesses will prove to be wrong.

Renowned startup guru Steve Blank famously said: “No business plan survives the first point of contact with customers.”

Ask any entrepreneur about their initial assumptions when they started. I guarantee almost all will say they got them wrong.

Why bother wasting brain cells doing a five-year sales projection when you know you’re really just taking wild guesses?

So wait, what do you do now? Do you even plan at all?

 

Create a model instead

While the business plan is obsolete, business planning is still quite crucial. Here’s one way to do it.

Instead of working on your business plan you should instead work at perfecting your business model.

Quite simply, a business model is a diagram that illustrates how your business adds value and makes money. It shows the different relationships between elements in your company, your company’s costs, and how your product reaches the market.

A popular framework, the “Business Model Canvas”, was created by Alex Osterwalder, a collaborator of Blank’s.

It is comprised of 9 elements:

    • Key Partners
    • Value Propositions
    • Customer Segments
    • Key Activities
    • Customer Relationships
    • Cost Structure
    • Key Resources
    • Channels
    • Revenue Streams

 

These are the basic building blocks of any business. Fleshing them out like this is a good exercise – it can help you better understand how your business will work and how you will make money.

 

Act quickly

Once you are done creating your business model, STOP any further planning. Resist the urge to use the model as the framework for your 100-page business plan masterpiece.

The next critical step is to TEST the assumptions you have created in your canvass.

So let’s say you write “Supply Chain Managers of FMCG’s” as a Customer Segment item.

Get out of the building and talk to these Managers. Talk to them about your product. Ask them if they will buy such a thing.

Better yet, build a prototype of your product to show your customers. If it’s a web-based solution for example, you can build wireframes on Powerpoint. This way you can demo your product without actually spending resources in building it.

 

Seek feedback

Now, shut your trap and just LISTEN.

I can almost guarantee that the feedback you will hear will prove your assumptions inaccurate. There is nothing wrong with this, because now, you know better.

Armed with feedback from actual customers, you then need to go back to your model and adjust.

Then with your adjusted model, you can go back to your customers for feedback again. Go through this loop until you get the model right.

This is the essence of ‘lean startup’ thinking. Rather than spending resources and valuable time crafting and following a static business plan, you need to spend your time crafting a business model and more importantly, testing it with actual customers.

The business plan approach presupposes you know what you are doing and that your plan will work. If you follow your plan and spend a ton of money on building a product WITHOUT validating your assumptions, well, this is equivalent to committing startup seppuku.

So stop killing trees in pursuit of your business plan. Get out of the building and build your business model instead.

Writer's Block

Peter Paul Cauton is behind Juan Great Leap, a blog and movement that pushes Filipinos to follow their passions and pursue startups. He is a career HR practitioner turned serial entrepreneur, co-founding HR tech firm STORM Consulting, executive search firm Searchlight International, and Streamengine Studios, which makes explainer videos.

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