Chapter 3: Three Reasons Why Business Plans are Ineffective

Business Plan is a lengthy document that is prepared with lots of brain muscle to work out the market gaps, competition dynamics, financial feasibility, expected profits, projected cash flow, tentative organizational structure, etc.

The purpose is to provide an economic justification for establishing a business to a potential venture capitalist to invest in business ideas for possible returns in the future.

The major problem is that the effectiveness of this document is more hypothetical than real! and can cause trouble in the following ways if you are new in the business.

1. Future is unpredictable:

A Business plan is based on the idea that the future of the market can be predicted by looking at past trends. Welcome to the fool's paradise. The market is a dynamic, continuously evolving system. In today’s world, the rate of change in market trend has only sped up thanks to the speed at which technology is transforming.

Even if you try to develop a business plan looking at the present conditions of the market, more especially consumer trends, the document might become obsolete during the weeks or months you spend preparing it. This might not be the case in the 1960s or 70s, however today it is, due to rapid changes occurring in consumer behavior. There is also a time lag, i.e. if there is a change inside the brains of your potential consumers, then you will know it only after a while which could be weeks, months particularly when it becomes visible as a trending behavior. Till the time you become aware, brains of your potential consumers could already have drifted elsewhere.[1]

Furthermore, if you are new in the business, it is very difficult to get an accurate legacy or record of consumer behavior which could be extrapolated into the future to make forecasts. Even if you get these the necessary data or insights, still there is no way to confirm the validity of future projection. This I have seen while working for a home appliance manufacturer, where despite tons of energy spent on forecasting future sales, the average forecasting accuracy never exceeded 20% despite the availability of all the necessary historical data.

So here is your first catch, you are virtually blind, and instead of accepting it, you are pretending that you can see things going on inside the brains of your consumers! Predicting what would be inside their brains is even a bigger challenge. Even if you become successful in gathering a lot of data, through secondary, and even primary sources, it becomes really dangerous, as the data brings a false illusion with it! You enter into a hubris feeling that you now know with certainty, but in actuality, there is no way to be sure.

2. Planning something too big to manage

The Business plan is prepared by default to set up a complete business organization with all its functions fully operational. Often business plans do not explain how these individual functions would interact with each other, and what would be the structure of rules which would define the nature of their interdependent interaction. This approach completely ignores the idea that complex systems do not jump out of thin air, rather they gradually, and organically evolve in the marketplace over the years, and even decades. Now if you attempt to do it otherwise, and erect something big, and complex in the first go which is also far from your capacity to manage, then it is not too hard to understand that you might end up in a disaster. Instead, one may start with baby steps, and grow gradually

3. The Embedded Intellectual Arrogance

Another thing which contributes in the above problem is that a nice clean document prepared with lots of hard work, which contains lots of intricate graphs, and tables, flashy terms, and calculations, etc. would probably make you arrogant, and trap you into hubris while making it difficult to accept a mistake which you might make during the practical implementation of your plan. Now, this is lethal. As during a business start-up particularly if you're doing it for the first time, you may expect yourself to make a lot of mistakes, and embrace lots of surprises ... but if you have already made up your mind regarding what to expect, and how to respond, then this rigidity may come with a price tag that you might not be able to afford.

The Alternative

Jim Collins notes in his book ‘Built to Last’, that all the organizations which he studied, don't rely on strategic planning, rather they "try a lot of stuff, and keep what's working"... As per Collin's observation, he found the Darwinian rule of “survival of the most adaptable” to be at work rather than complicated business strategies. Ricardo Semler, CEO of Semco Corporations, in his talk at MIT titled 'Leading by Omission', also argued on the same lines saying it’s never really possible to predict, and there is too much gap between the forecasted figures and the actual. Furthermore, Nassim Nicholas Talib in his book ‘The Black Swan’ argued that despite how good the intelligence functions of the military might be; they never compromise on their ability to swiftly respond to any attack, and the same applies for business.

During the start-up, when nothing is certain, and you are inexperienced, the skill that can help you the most is your ability to quickly adapt, and respond to any new surprise that struck you anytime in the marketplace. Furthermore how afraid are you to make mistakes, and learn from them… if you are, then surely the business plan method would attract you more as its intellectual appeal tempts you to believe that there is indeed a way where things can go as predicted, also without compromising on the demands of your ego. So how can we start a business without a business plan, we got to have some plan! Isn't it? Yes indeed, but not the type of a typical business plan which is taught in business schools. Part 2 of this book will walk you through the step by step process.