Business plans are a necessary evil: a business plan is one of the best ways to show bankers, venture capitalists, and other investors that you are worthy of financial support. This article illustrates what makes an excellent, usable, and actionable business plan.

DO YOU know anybody who has ever written a losing business plan? Whenever anybody has a new idea or initiative, before investment dollars are won, the prerequisite of a business plan is demanded.

The problem is, too often those who write the business plan are the very same people that conceived the idea, and thus they are biased.

The final page of most business plans is usually a spreadsheet that quantifies the opportunity. What happens if when the numbers are run, the outcome is not as good as you expected? Change the numbers to get the result you always knew would be correct.

Unfortunately the above scenario occurs too often. Thus, not surprisingly most new ventures, even those supported by a "winning business plan" usually fail.

Market Failure

If we examine the reason for such failures, the single biggest is market failure--you just don't sell as many widgets as you forecast.

Indeed there have been some classic market failures, even after the most in-depth and rigorous market research. The infamous Ford Edsel car in the 1950s is just one classic case study. The much heralded Apple Newton and the Sedgway two wheel transporters were also less than impressive in the commercial realities of consumerism.

A valid question may then be: "Why bother with the business plan at all" or "How can we reduce the risks in writing business plans?"

[ILLUSTRATION OMITTED]

Business plans start you on the journey and are usually demanded, especially by astute investors as a test of your commitment and competence. Investors invest in people more so than the opportunity. Hence a logical business plan considers all the important issues and presents a good business case.

We should dispel the myth that if we persist we will succeed. No amount of persistence will turn a "dog" into a "star". Perhaps this is best summed up in the following:

Persistence is an important element of
success

Persistence is an essential element of
failure.

The business plan is the first step that wins funding, allows you to assemble a competent team and commence the journey. Few people who take this first step towards a goal end up where they expected. Indeed the astute entrepreneur will often find that the real pay dirt is off to the side somewhere, but they are astute and brave enough to recognise this and capture the real target. You have to know when something is not working, stop, and find the real opportunity.

Making the Purchase Decision

To reduce the risk in writing business plans, you have to understand the market, the value proposition, the value chain, and innovation.

People only purchase things when they see value for money. Be it a power tool or a Rolex watch, people assess and reach the value decision before they make a purchase. The value proposition says:

If I spend A$ to get B

I will only do so if I believe that B is at least equal to or greater than A$.

We need to understand this value equation and relate it to our venture. In addition, we need to consider the participants in the chain of events that will get a product to the market. This is commonly referred to as the "value chain" and includes all the players from the inventor or creator through the distribution network to the seller, the purchaser, and the user.

Finally, consider the new value chain player, the carbon footprint. If your new venture is not carbon friendly (a small carbon footprint) then beware as you will likely get great market resistance.

All players in the value chain need to have a positive value proposition. Even in the case of loss-leader items, the sums have been very carefully done to ensure the ultimate value or return on the investment is obtained.

Notice also that in some cases the user is not the purchaser. Such cases need special consideration as to what value the purchaser gains. This case may apply to purchases of special treats or toys for children, but there are also examples of industrial products that have failed because of a failure to understand that the purchaser was not the one deriving the ultimate value.

Understanding Market Risk

To gain a snap shot of market risk consider the following diagram that can be representative of any product or service. On the horizontal axis are the sectors that characterise everything, these being industrial or commercial products and services, consumer products and services, and fashion products and services.

In the case of power tools, fax machines, and high speed photocopiers, the value proposition can usually be easily quantified and a rational purchase decision reached.

[ILLUSTRATION OMITTED]

In the case of consumer products, advertising is what attempts to establish a value proposition. People who are not moved by this type of argument often purchase lower priced brand items.

There are fashion items where the value propositions are so abstract they beg belief. Fashion companies spend many millions of dollars establishing their brand as their value proposition.

On the vertical axis of the market risk map is the degree of novelty. How new is it, is it completely novel or have I seen if before? Unfortunately newness often spells high risk.

It is important when developing a business plan to understand where you fit on this map. The blue area is the ideal place to be because items in this area usually have quantifiable value propositions and low novelty that allows people to relate to what they are purchasing and how it can be used.

A mechanic will instantly relate to the benefits of a double ended or shifting spanner compared with a single-ended one. The top left hand yellow area represents products that when introduced were completely novel. These include such things as the photocopier, the fax machine, and the PC.

These high novelty products had long and difficult gestation periods. People simply could not relate to them or how they could be best used. Many of these products took decades to pervade the market.

Moving to the top right hand corner, it is virtually impossible to make the vaguest estimate of the likely sales volume of such an abstract product where the value is virtually impossible to understand. True the Rubik's cube was a remarkable success, but if asked in advance where would you invest your money, a Rubik's cube or an improved spanner, the answer is the product for which you can both see the value and understand its function.

[ILLUSTRATION OMITTED]

Innovate--Don't Invent

The lesson to be learned is to innovate not invent. The word innovate is best defined as change that adds value. The ideal way to mitigate business risk is to remove market risk by finding something that everybody is purchasing, improve or innovate it and go back to the market with a better one, preferably at a better price. This is a low risk strategy founded on the certain notion that anything can be innovated, or improved.

Fast Second is a Great Strategy

This classic business strategy is often referred to as "fast second". Rather than the questionable so called advantage of being "first mover"; in many cases being second is better, and certainly carries less risk.

New ventures not protected by patents that succeed find that competitors, seeing the profits of these products, enter the market as followers.

The result is that over time the profits of these initially highly successful ventures fall to a low level. At that time there is a market shake out leaving a few to survive in businesses that are only modestly profitable.

City-based convenience stores are a striking example. The early ones were amazing success stories charging exorbitant prices for "must have" conveniences. Now you find most cities saturated with these stores, all fighting for a share of a much diluted market. Video rental shops are another example.

If we accept that pioneering may be a risky, perhaps the best way to enter or improve your business is to remain vigilant and be early to spot the emerging successes and then innovate the successes and return with a better offering.

Henry Ford did not invent the motor car but when he saw the market opportunity afforded by the first clumsily-built expensive cars, he innovated the process of manufacture and thus brought cars to the masses.

Bill Gates was not first with the Windows style GUI, indeed many would argue he was third after Xerox and Apple, but look at the success of this third market entrant.

IBM is another example of a company that was not first into the personal computer market, but when it realised the market potential of personal computers it quickly moved into the market, as fast second.

Business plans are essential, but understand that what underpins success is the value you are delivering, and how people will relate to your offering. The business plan is just the start of a very long journey.

Roger La Salle is a well-known speaker on innovation, opportunity, and business development. He will conduct the La Salle Business Development Matrix: A Structured Approach to Business Building workshop at SIM from 20 to 21 May 2009. Please contact 6248 9418 or [e-mail]