Most business plans are written for opportunities that are fundamentally flawed. Why write a business plan for a no-hope opportunity? It’s a waste of entrepreneurial time and talent. John Mullins believes you need to think before you write.
This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.
What I call a ‘customer-driven feasibility study’ is something which entrepreneurs, whether in nascent start-ups or deep in the bowels of an established company, might use to guide their assessments before they invest precious time and effort in writing a business plan.
There is considerable overlap in the content of a customer-driven feasibility study and a business plan. And that’s actually a good thing. In fact, all of the analyses I advocate are essential, though not sufficient, for crafting a thoughtful, evidence-based business plan. So, what’s new here? What’s different from a business plan?
Customer focus The feasibility study is focused on the customer. As Peter Drucker wrote many years ago, the purpose of any business is to win a customer. The feasibility study hones in on that purpose, one quite different than that of most business plans — to win an investor. Without the likelihood of there being customers, there will probably be no investors.
Economic fundamentals The feasibility study succinctly addresses the fundamental economics of the business, by identifying the key drivers of cash flow: revenue, customer acquisition and retention costs and timelines, gross margins, required capital investment and the working capital characteristics of the operating cash cycle. If these drivers are satisfactory, detailed strategies — for marketing, operations, and financing — can probably be developed to make the venture economically viable, provided the market, industry and team elements are sufficiently attractive. If they are not, there’s little point in wasting time developing such strategies.
Mindset The customer-driven feasibility study asks the critical questions necessary to satisfy the entrepreneurial team’s curiosity about the attractiveness of the opportunity itself and makes it possible to answer these questions before developing the detailed strategy necessary for the completion of a business plan. Thus, its mindset is to ask (and answer) questions, not to sell the venture’s merit. In contrast, the business plan organises the answers delivered by the feasibility study and goes on to develop marketing, operating and financing strategies in an effort to sell the opportunity, in a sharply focused way, to investors and other stakeholders.
“Are these differences worth the effort?” you might ask. Why shouldn’t you, as a would-be entrepreneur, simply skip the feasibility study and proceed directly to preparing a business plan?
First, researching and preparing a customer-driven feasibility study gives you a chance to opt out early in the process, before investing your precious time and energy in preparing a complete business plan. Thus, it can save weeks or months of time that might be wasted on a fundamentally flawed opportunity.
Second, for opportunities that do look promising, the feasibility study jump-starts the business planning process and provides a clear, customer-focused vision about why your proposed venture makes sense — from market, industry and team perspectives, viewed independently and collectively. It identifies the customer pain, how you’ll resolve it, and the one or two domains that probably make the opportunity stand out. These factors become the drivers of your business plan.
Third, by ensuring that all aspects of the opportunity are examined, your analysis can better understand and thereby reduce your risk of entering a fatally flawed venture.
Asking and getting answers to the feasibility questions with an open mind — deliberately, objectively and comprehensively, based on real-world evidence, rather than hopes or dreams — is an important first step that entrepreneurs all too often ignore.No car buyer would buy a new car without a road test, and that’s a far less risky decision than the one you are about to make. A customer-driven feasibility study is the entrepreneur’s new business road test. Entrepreneurs who proceed without doing one ignore it at their peril.
John W. Mullins (email@example.com) is Associate Professor of Management Practice in Entrepreneurship and Marketing and holds the David and Elaine Potter Foundation Term Chair at London Business School. This article is adapted from The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan (3rd Edition), FT/Prentice Hall, 2010.