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The myth of the business plan The myth of the business plan
by Murray Hunter
2012-12-02 11:50:52
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What did Bill Gates, Steve Jobs, Michael Dell, and Mark Zuckerberg all have in common? Yes they were all highly successful start-up entrepreneurs. But they had something else more in common, which I'll mention later.

     The formal business plan has been glorified by events like ‘entrepreneurship week’, ‘business plan competitions’, and ‘entrepreneurship awards’. Business schools have developed inspiring spiels about the importance of the business plan and make it the centerpiece of the courses they provide.

So it's very apt to take some time and see if there is actually any value from doing up a formal business plan.

First lets think logically about a business plan. Formal business plans and forecasts do little to assist in the analysis of the viability any new ideas. A large amount of time spent analyzing the idea in depth will probably not shed much further understanding or reduce uncertainty about its potential success. Entrepreneurs can consider the probable customer perception of the value proposition and price-value relationships – which are purely subjective. These perceptions can be further tested as to how easily this value is perceived by potential customers through focus groups.

The longer it takes for individuals to perceive value, the more risk in the inherent opportunity.

After saying all that, forecasting the future, especially for a new idea, can be no more than a guess. Just see what I mean by trying next week to pick all the football game winners. See how many you get right. I believe you will get more wrong than right on average over the season.

So what's the value of doing up a business plan then?

The formal process of doing a business plan makes you think of all the issues. Doing a business plan makes you think about what could happen and how you will attend to any potential challenges that may occur. It's an opportunity to consider the options and consequences about what you want to do in a particular business.

Consequently, unless you want a loan or going for some kind of business grant, which less than 4% of new entrepreneurs actually get; the business plan is something that could be much less formal that what business schools are teaching. For example a mind map would suffice.

 Probably the major criteria when you are looking at any opportunity is what we call the  opportunity cost of investing time and resources into an idea. This means that you compare the cost of doing something rather than doing something else like working in a job for example. It's a relative comparison, not something arbitrary that you can actually measure, except in your own feelings about the idea you want to pursue, verses keeping the job you have, or working for someone else.

 In the end, usually other factors such as being your own boss, being independent, and or doing something you really like will be major issues that influence you. Any formal business plan won't show this out. A business plan is usually only concerned about profits and losses and not personal satisfaction.

The only way I know how to understand the viability and risk of any opportunity, is to learn about it through doing. Ideas tend to be very mysterious until we actually pursue them by doing a business. Our willingness to continue experimenting through a business depends upon the personal motivation to continue, i.e., do I still feel that the idea is viable and worth my time and efforts?

If we followed our optimistic business plan, we would probably pack it in and close shop because we haven't met our financial objectives on time. Business plans can deceive and de-motivate us, as the reality of doing something is so much different than dreaming about it, which is what a business plan really is - a dream.

You learn to adapt when you start up a new business, personally growth within it, and acquire what skills you really need. Nobody can really accurately foresee these things when they are doing up a formal business plan. You may only decide to grow the business after you have confidence, or most likely you may end up doing something that you didn't quite plan at the beginning. For example, a good friend of mine, Professor Howard Frederick, an entrepreneurship professor in Australia started a chocolate business, but found it initially very difficult to sell his "up-market" chocolates around Melbourne. However after adjusting his business model, Howard and his wonderful wife Hanna now have one of the most successful Hi-tea event businesses in and around Melbourne.

So the moral to this story, is don't get hung up on doing a great looking formal business plan, unless you are going to see a bank or get a partner involved. Use your energy to develop that business model we have talked about previously and prepare to be flexible for the greatest chance of success.

And what did Bill Gates, Steve Jobs, Michael Dell, and Mark Zuckerberg all have in common? None of them had a formal business plan.

 


    
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Emanuel Paparella2012-12-02 12:44:02
Here is a personal anecdote on business school and business plans which may be relevant to the subject at hand. A few years ago at the school I teach a guest lecturer from the Department of Business Administration of a nearby university delivered a one hour lecture on planning and starting a business within the system called Capitalism. He introduced the subject with an historical peroration on the glories of capitalism from the Industrial Revolution to the present which he characterized as the best possible economic-financial system on this planet. He then went on to impress upon his audience that the theory always comes before the practice and the best way to insure failure is to start with the practice. This struck me as a reinvention of the wheel since Aristotle had made that same important metaphysical important point some 24 centuries ago and it would have been nice to give him some credit, but I suspect the professor was blissfully ignorant of that fact. He proceeded to stress the importance of a well thought out plan which needs to be scientific and in unison with the latest research, statistics and findings on a particular business. He exemplified this by placing on the overhead projector’s screen a series of formula and theorems on market forces that need to be considered; this was intended as a scientific “theory” behind capitalism per se, all the while stressing the importance of discipline in careful planning. The audience was told that if one applied those formulas diligently, the results were inevitable, not unlike a well conducted scientific experiment.

At this point a hand from a humanities' professor went up followed by this question: but Sir, where within these complicated formulas describing capitalism and business theory and planning, where would you place greed; I do not see that in your formulas? There was a moment of silence and a perplexed look on the professor's face, but he quickly recovered his composure and replied: greed is a human psychological emotional factor with which science remains unconcerned; science deals with the hard ineluctable facts of the phenomenon, not human emotions.

At that point I thought that those two professors came from two different parallel universes and the two would never meet. Today, after the big global recession and nations and continents and even civilizations on the brink of financial-economic ruin and political chaos and misery, I keep on wondering if that simple naive question on greed should have not have been entertained a little less glibly and a bit more seriously by the eminent business professor. But I suppose that, from the perspective of the universe he was coming from, he couldn’t have answered differently.


Murray Hunter 2012-12-02 17:14:14
Prof I highly recommend David Harvey The enigma of capital and crisis of capitalism
Too many people are trying to describe the world and then explain why it is so. Theories are just narratives and any situation can have multiple narratives.
Professors tend to try to justify their existence by inventing and/or perpetualating a discipline that may be nothing more than an illusion - such as entrepreneurship or economics. Peter Druker Innovation & Entreprenruship 1985 said entrepreneurial part of a business is only soemthing that occurs at start-up something like the big bang that starts up a universe every now and again within our multiverse or parallel universe as you mention.


Emanuel Paparella2012-12-03 09:27:21
Thank you for the tip professor. Indeed what you say is quite true. Theories are professors’ stock in trade; that’s how they make a living and acquire fame in academia and even Nobel prices. But of course the existential narrative of man is a bit more complicated than a neat scientific theory on a board. As Einstein, who was a professor, but also much more than a professor, said to a colleague once: what you just wrote on the board is a dead theorem, but the universe my friend flies and is alive. Meaning I suppose that theoretical scientific explanations do not even begin to explain the mystery that is man who is alive and part of a live universe. David Sparenberg and Teilhard De Chardin and Thomas Berry probably do a much better job at it. It is actually even more complicated than simple greed I am afraid; there is also fear and envy and hubris, the stuff of Greek tragedies which unfortunately those of a positivistic scientific bent consider useless or mere frosting on the cake of positivistic explanations of reality. What they fail to grasp is that to do that is to put at risk one’s own humanity.

As you know, C.P. Snow wrote a book decades ago still worth reading. I believe it was titled The Two Worlds, i.e., the world of the humanities and the world of science. Therein he describes the two parallel universes that only meet and bypass each other like two silent ships in the night.

I wonder how many of our scientifically inclined professors read Greek tragedies and mythology. Einstein and Freud certainly did, but I suppose they are deemed aberrations by the brave new world in which we live and have our being. Perhaps Heidegger put it best: only a god can save us now!


Emanuel Paparella2012-12-03 09:45:23
Errata: the actual title of C.P. Snow’s book mentioned above (which came out in the mid 50s) is The Two Cultures and the Scientific Revolution. It was listed by the Times’ Literary Supplement as one of the 100 books that most influenced Western public discourse after World War II.


Murray Hunter2012-12-03 12:59:09
Prof, I think you will also enjoy reading Ian McGilchrist The Master and the Emissary


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