About three years ago, I had the opportunity to speak with a venture capital analyst about a new software company his firm was funding. The company was in the analytics space and proposed a creative pricing model to compete with existing vendors. The “plan” was for the new company to convert just 5% of the existing market in the first years. New customers would turbo-charge the company into early profitability from which it could subsequently grow to gain additional market share. Life with this plan was good. Alas, the real world was not very accommodating, and the initial plan had to be scrapped. Now, three years later, the company is back at it with an additional round of funding – and a new plan.
The misfirings of even the most meticulously assembled business plans are not surprising to John Mullins and Randy Komisar, authors of the MIT Sloan Management Review article A Business Plan? Or a Journey to Plan B? Indeed, according to the authors: “Most new ventures, even those with venture capital or corporate backing, share one common characteristic: They fail.” The antidote to the failure of Plan A? “There is a better way to launch new ideas — without wasting years of time and loads of investors’ money. This better way is about discovering a business model that really works: a Plan B, like those of Google Inc. and Starbucks Corp., which grows out of the original idea, builds on it and once it’s in place, helps the business grow rapidly and prosper.”
The authors' recounts of the failures behind the initial concepts of Twitter, PayPal, Ryanair and even business noblesse Apple and Google, offer food for thought. As an illustration, it seems Twitter emerged serendipitously from Odeo, a new venture podcasting service. While the company was struggling early, one of the founders wondered “ if a short messaging service that would enable everyone in the company to communicate with others in the group might be of some help. Their solution, which the world now knows as Twitter Inc., was to build a simple Web application that would let the team stay in touch by sending short 140-character messages to the rest of the group. It wasn’t long before they realized that the new application held considerably more promise than the original podcasting idea on which they had been working.” Better lucky than good!
It's great to identify problems with Plan A, but A Business Plan...also proposes a framework for helping failed Plan A's get to Plan B. The authors first suggest that planners borrow ideas shamelessly from the successes and failures of others – analogs and antilogs in their jargon. Planners should then investigate their business proposition for differentiation on five financial metrics that answer the following questions: Who will buy? How often? How soon? At what acquisition cost? How much money will you receive each time a customer buys? How often will they send you another check? “identifying your most important leaps of faith and testing a series of hypotheses to inform all five elements of your business model will give you much of the data you need to craft a possibly compelling business model.”
Mullins and Komisar call on business intelligence to guide the journey from Plan A to Plan B, proposing a dashboard to communicate success and failure. “the journey needs a tool to point the way and track your progress, something we call a dashboard. A dashboard drives an evidence-based process to plan, guide and track the results of what you learn from your hypothesis testing.” The dashboard forces the business to 1) think strategically about critical issues; 2) rigorously test leaps of faith in the proposed business model; 3) provide for evidence-based decision making by systematically testing hypotheses on how the business will operate.
While A Business Plan...offers a well-formulated prescription for addressing “contingency” business plans, its discovery emphasis is not new. Bschool professors Rita Gunther McGrath and Ian MacMillan espouse a method of strategy formulation called Discovery-Driven Growth that likewise calls for an adaptive planning approach. DDG “recognizes that many of the data that you need to make decisions don’t exist at the time that you have to make the decisions. It’s a plan to learn......You have to make assumptions. The key issue is to know from the start that the plan is wrong. That's the only thing I know about the plan -- that it's wrong. So, how do I plan in such a way that I come out with the right solution but not necessarily know what it is at the outset? That's what discovery-driven planning is all about. ”
Business is not alone recognizing that top-down planning methods are often flawed. Developmental economist William Easterly has written extensively on the Planning/Searching dialectic for the international war on poverty. Easterly's an unabashed critic of heavy-handed planning for foreign aid, preferring instead a more learn-as-you go “searching” approach. Rather than the big, top-down win, Easterly seeks a steady stream of smaller victories fueled by experimentation and continuous learning.
I'm a big proponent of a planning-searching compromise: start with a carefully-constructed top-down plan with clearly-articulated hypotheses, acknowledging the driving assumptions. As the plan unfolds, take continuous checkpoints. To the extent the assumptions hold and the hypotheses ring true, stay the course – all the while observing results. If the initial plan falters, adapt quickly using what you've learned along the way to craft and adopt Plan B. Perhaps President Eisenhower was right when he said: “Plans are useless but planning is indispensable.”
Steve also blogs at Miller.OpenBI.com.