Why Business Plans Fail

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The lack of a business plan is frequently cited as the leading cause of small business failure.  I would suggest that a business plan could also be a contributing factor to failure.  Most business plans are detailed and present clear goals and a defined path to reach those goals.  Unfortunately, many business plans are written in a vacuum and are based upon assumptions and unquestioned research.  For a business plan to be a driver of success, those assumptions need to be tested and validated.  This is where a business model can make the difference between success and failure.
In process improvement and automation the common refrain is “fix before automating.”  The warning inherent in the phrase is that if you simply improve or automate the wrong process, you can get to the wrong destination faster.  Business plans are commonly written without considering the ramifications of the “fix before automating” rule.

Great amounts of time are poured into creating beautiful plans, but much less time is applied to ensuring that plans are “true.”  Most plans are full of hypotheses, but the hypotheses aren’t validated or tested until the business launches.  In this case, a considerable amount of capital can be expended trying to execute a flawed plan and this can spell doom for some businesses.

How do you avoid falling into this trap?  The most effective way to write a business plan is to begin by building a business model.  The exercise of building a business model and testing the assumptions in the model are powerful tools that will help build a business plan that will drive success.

A business model typically considers nine components and the relationship between components:

Value Proposition:  why will customers value your product/service and why should they choose your business to supply the product/service?

Partners:  what partners will you have in your business model and what role will each partner play?

Actions:  what actions are necessary to execute or deliver your business/product/service?

Resources:  what resources do you need and do you have within your business or partnerships to deliver on your value propositions?

Customer Relationships:  how will you build relationships with your customers and help shape their experience?

Channels:  how are you going to deliver the product/service to your customers?

Customer Segments:  how can you target specific segments of customers who will be interested in purchasing the value proposition delivered by your product/service?

Cost structure:  define your costs and understand them clearly.

Revenue Streams: what are the sources of revenue created by your business model?

We use a large wall chart when we work with clients to brainstorm and develop business models.  We work through each area, placing sticky notes on the board with the attributes and characteristics that fill each segment.  When we have the components described and the exercise is complete, we transition into adding numbers to the business model.  Where appropriate, we ask questions such as:  how big is the market, how much does the channel cost, what is the revenue on variable quantities, etc.?

When we’ve completed describing the model and adding the numbers, we have an idea of the revenue generating capability of the business model.  At this point, we are operating on assumptions and if we stop here we are no better off than if we had written a untested business plan and launched the product/service/business.  We need to “get out of the building” and test the hypotheses.

You need to go out and ask questions of your customers or prospective customers, talk with potential partners, test the channel, consider focus groups, etc. to check and double-check the assumptions that are the structure of your business model.  Verify and validate your hypotheses until you are confident that you’ve created a viable business model.

Once you have a validated business model, you can launch your product/service/business with confidence.  Only now should you consider writing the business plan.  With the completed business model, crafting the business plan is much easier and it becomes a powerful tool to guide your business.  Following this path helps businesses spend resources effectively; you plan well and validate with minimal cost before you launch the business/product/service.   A business plan informed by a validated business model is a powerful tool that helps businesses succeed and avoid the pitfalls of improper planning.

 

Michael Nelson

The Cogent Coach

Small Business Coach

 A great place to read more on business models:

  • What is a business model? « Business Model Alchemist – A detailed article describing exactly what a business model is and now it is related to innovation. ] the price, what's the channel, what are the product features that matter, etc. All of these initial assumptions must be right for the revenue plan to be correct.

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1 comments
Meyer Mussry
Meyer Mussry

In logic, if you construct an argument on a false premise, the argument has no validity and is likely to return a false result. The same is the case in business. Assumptions must be tested, and appropriate market research done. You must give your customers what they want, in the way they want it, at the price they are prepared to pay, and in the place they want it - or lose relevance and customers. So far, we are completely congruent in our approach. Where we differ is that I recommend this work be done as part of the plan, at the beginning. I don't treat it as a separate exercise. Industry ratios may be used as a guide to the reasonableness of certain assumptions, which helps with the financial modelling. I tell my customers that if their idea isn't going to work, it is better they know it at the beginning, rather than risk their home and future on untested assumptions. Another thing is to consider if the plan is for a new entity, or for an existing business. In one case the premises may be completely untested and require research, and in the other the research could be there as a result of everyday business activity. Plans must reflect the situation of the organisation.

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