Business plans, when introduced early on in an innovation exercise, are a dangerous document to create. It's simply the wrong tool for the task and it might even lead to an expensive lesson in failure. Businesses need to throw out the business plan during the early stages of validating an idea, and instead take small, quick, incremental steps to test their business idea in the market.
This approach relies heavily on iterating throughout the learning process and will help strengthen your initial hypothesis. Your first idea will change drastically as you adapt and evolve it into something that’s market worthy.
Only when enough market evidence has been collected, and your team can prove that the proposed business model can succeed, should teams consider developing a business plan that will execute on your findings.
Most businesses, especially corporations, spend countless hours refining business plans before their idea has shown proof of success. I’ve dedicated a big chunk of my life studying this poorly constructed habit (our Strategyzer blog is full of business innovation examples), and I’ve witnessed countless organizations make expensive mistakes when diverting resources, convincing leadership, and scaling too early that could have been avoided.
Here are three reasons why developing a business plan so early in your innovation process can be risky and expensive:
1. Business plans don’t prove an idea will work.
Businesses will spend a lot of money and countless hours refining a business idea before anyone involved can confidently produce market evidence that shows potential customer interest. Testing can be cost effective, light on resources and an agile approach to validating a series of assumptions about your potential customers and their needs.
Think of a restaurant in your neighborhood that didn’t last long. There are three reasons why the business may have failed. The owners probably didn’t:
Test the location to determine if it’s the right fit.
Test the food through a pop-up shop or market stall to see if people were hungry for their product.
Take that evidence and then adapt it to new areas or offerings.
Starbucks is an example of a company that is constantly testing and introducing new products and services. The company recently announced that in 2016 it would test delivery options in two American cities. While it sounds like Starbucks is just testing this idea now, the company would have started testing months ago to determine which locations are most suited to a delivery service. As the test progresses, Starbucks will take what they learn from deliveries in these two cities to adapt or scale out the new service option to other cities.
Key lesson: The first step is to test the idea immediately, and then adapt and evolve the idea based on market feedback. It’s very likely that your idea will change, so that it improves based on iterative feedback cycles. Ideas can start with a sheet of paper to define the concept and then evolve into a short survey or interactive exercise to start collecting evidence.
2. Businesses lock themselves in by selling a business plan to leadership and investors.
Many business leaders will sell a polished business plan to leadership and investors before even knowing if the market is responsive to the idea.
This is a big problem. As soon as leadership and investors buy and finance a plan, they’ll expect business success exactly how it was laid out in detailed business plans. If testing proves the idea is weak, it’ll be difficult to go back to leadership and take a different direction from what was already approved. Your leadership’s opinions should never be more important than hard facts. It’s the customer who will be your judge, jury and executioner. They decide the ultimate fate of your business model.
Let’s look at Amazon, the largest Internet-based retailer in the United States. Amazon started selling five products in the early 1990s, and then moved into book sales, online server storage, grocery sales and more. How did Amazon survive over 20 years in a competitive market? Founder Jeff Bezos doesn’t promise on a business plan, he simply promises to pursue bold ideas.
Those bold ideas help Amazon to constantly test new approaches around deliveries, shipping and forays into new market opportunities based on existing or underused internal resources. Not all of these experiments turned out to be successful, but they do plant the seed for future iterations or product opportunities that have yet to be tested. This allows Amazon to display how the company hopes to minimize failure, rather than building a business plan that risks getting cemented in one direction that has yet to be proven.
Key lesson: Don't sell leadership a polished and refined business plan. Sell them an opportunity and a rigorous process that will turn your idea into an executable business model for producing market evidence.
3. Business plans scale on premature ideas.
A business that scales too quickly, against a business plan rather than hard market evidence, has a higher likelihood of failing hard and fast. Your team can save itself from wasting resources.
A former startup called Better Place is a good example of this scenario. Better Place was founded in 2007 as a venture-backed international company that produced and sold battery-charging stations for electric cars. Better Place built the stations they thought people wanted before knowing if the market would be responsive to its solution. Participation was too low to balance the large infrastructure investment and pilot programs in several countries. The company went bankrupt in 2012 citing an $850-million financial loss.
Key lesson: Don't invest in execution until you have strong evidence that your idea will work. Otherwise you risk premature scaling and running out of money.
Your ideas need to be tested and validated well before your team embarks on building out a business plan. It’s the only way you can observe whether there is a market fit for your thinking, and it’ll result in a cost-effective approach to testing out your business assumptions. This isn’t just my opinion, it’s knowledge steeped in facts generated by countless startups, Fortune 500 companies and government organizations like the National Science Foundation that have applied this approach successfully.