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The Fallacy of Planning (Part Two) :- Five Reasons Why Business Plans Don’t Work for Innovation

This is a follow-up on my last post on business plans  which argued that most large companies have processes designed to deny investment in new product ideas, if these ideas are proposed without business plans. My argument was that these processes hinder innovation, even as the company is training its employees to become more agile and use lean startup methods. This raises two important questions:

  • What is wrong with business plans anyway? Large companies have used business plans successfully for decades. Why should they change now?
  • If we stop using business plans, whatever shall we do? How will a company manage its investments in innovation?

This post will attempt to address the first question. The second question will be addressed in follow-up posts. Let me also be clear that this post is about investing in innovation and managing new product development. It is in these situations that I strongly feel that innovators have been presented with an unfair choice to write a business case in order to get investment. This insistence on writing business plans is justified with several false assumptions. In this post, I will outline the top five:  

  1. The first assumption is that, in order to innovate, it is important to plan in detail what you are going to do. You can’t just develop a new product without first developing a great plan. How will you know what things you need to do? Also, how will management know what expectations to hold you to? The false assumption here is that reality will somehow conform to the plan once the innovator starts working. This is of course not true. No business plan ever survives first contact with customers.
  2. There is also an assumption that the plan will somehow reveal to management or venture capitalists whether the investment is worth making. The five-year projections are meant to show management that they are going to make a lot of money on their investment (aka return on investment or ROI). If we look at the formula for calculating ROI, we can clearly see the problem with this approach for new ideas. To calculate ROI you need data on the total revenue the product will make and total costs of creating the product. For new ideas, the honest answer to this question is “… we don’t know”. But if your company requires these numbers, then you are going to make them up. The ritual board meetings that follow, serve to further institutionalize these falsehoods by evaluating the numbers as if they are real!
  1. The third assumption business plans make is that innovation is a linear process. The reality is that innovation is a nonlinear process that involves several false starts. Over 90% of all startups fail. Having a business plan is not a clear predictor of startup success. Indeed, many investors highlight the fact that, of the remaining 10% of startups that succeed, the majority succeed at something different from the idea they first pitched. This, in fact means that, the failure of original ideas in business plans might be close to 100%. Innovative ideas succeed after several tweaks and iterations. This process cannot be ‘planned’ in advance, and any business investment process that pretends it can is setting the company up for failure.
  2. Connected to the assumption that innovation is linear, is the assumption that before testing our ideas, we already know what customers want. This ‘build-and-they-will-come’ assumption is one of the fundamental reasons innovations fail. Just because you think it’s a cool idea does not mean that customers are going to want it. Your five year projections of increasing revenues year on year falter when you build it and they don’t come. Or they come in far less numbers than projected. Planning does not make this all better. Finding out what customer really want is the cornerstone of innovation.
  3. Finally, business planning is problematic because it focuses teams on executing rather than testing their ideas. I was once in a meeting where I was trying to convince a team to test their business model. They kept saying they don’t need to do that because their business plan is valid. After they had repeated this several times, I asked them what they meant when they said that. Their response was telling: “Our business plan is valid because it was approved for investment by the board”.  I had to remind them that there is no such thing. Business models are only valid if they have been tested with real customers in the market place.

Business planning for innovation is problematic for all the reasons noted above. The investment board meetings at which these investments are managed makes the problem worse by evaluating teams on the basis of whether they are on time and on budget, as per their business plan. The question of whether the product actually meets the needs of real customers is hardly ever raised at these meetings. However, as Eric Ries notes “… if we are building something nobody wants, it doesn’t matter if we’re doing it on time and on budget”.

Read part one and part three of this series by clicking on the links below:
The Fallacy of Planning (Part One) :- You Have NO Business Plan: How Could We Possibly Invest In Your Idea?
The Fallacy of Planning (Part Three): How To Manage Innovation Without Business Plans

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