Business planning, when you think about it is a bit of an oxymoron.
The only thing you know for sure about your plan is that it will be wrong.
George Patton said ‘Without a plan, you are just a tourist’ and even that great social philosopher Mike Tyson weighed in with ‘everybody has a plan until they get hit in the face’.
However we persist in writing what is usually a document full of crap that is not looked at again, until next year.
Here I am going to offer you an alternative to the formatted, templated, disciplined plan, so beloved of accountants, banks, and education institutions. I am going to suggest you use ‘Mental Models’ to ask the right questions, gather information, generate insights, create strategies that are meaningful, implementable and measurable.
Albert Einstein used mental models to develop his theories of relativity and quantum physics.
If employing mental models is good enough for Albert to articulate a picture of uncertainty, ambiguity, and then hypothesise about its hidden drivers, it should be good enough for us.
Mental Models are frameworks that can be used to simplify problems, to ensure that the right questions have been asked, and the explanations that evolve from those questions hold when subjected to detailed scrutiny and testing.
Mental models frame things.
As a kid I loved cricket. I would walk to school early, and play for a couple of hours before ‘the bell’. As I came up to the oval attached to the school, when someone was batting, I could see the stroke, then a second or two later, hear the bat hit the ball. Clearly there was something at work here I did not understand. Dad explained it by telling me that sound travelled at 740 mph, while light, which enabled me to see the stroke travelled at 186,000 miles per second. This meant the sight was instantaneous, the sound was not.
Hearing the bat hit the ball a second or so after seeing it hit the ball created a mental model that made the understanding of the effect of the differing speeds of light and sound absolutely clear. Had I been a mathematical kid, I could have measured the speed of sound by measuring how far I was from the batting crease, divided by the time it took for the sound to reach me. This is exactly what Albert did to come up with E=MC2, although a little more complicated.
Einstein used simple mental models to come up with his theories of relativity, then worked his way through the maths to test and ultimately validate the theories mathematically. It is only now that some of the stuff he hypothesised about is becoming confirmed, as the measurement of the effects he hypothesised are becoming available.
The origins of the business plan was to attract funds. If someone was going to lend you money it is reasonable that you told them where you would be spending it, what the risks were, and the means by which you were going to repay the debt.
Banks, which are usually the first port of call when seeking funding are not particularly interested in your success, they are interested in the asset backing you have, so that when you go broke, they can sell up and get their money back. They would prefer you did not go broke, just because that complicates their lives, but they ensure they are covered if you do.
Banks are not your friends, they sell a commodity: money, and like any sales organisation, will sell as much of it as they can within their risk parameters and any regulatory restrictions, by solving your cash shortage for you.
Therefore the standard P&L, and balance sheet projections, with a few discounted cash flow scenarios were enough. All accounting and management education was oriented towards this model, so it became widely used and abused, but if you are going into a serious business planning exercise for your business, in this homogenising and increasingly volatile world, it should not be enough for you.
Do not think about business planning as a linear incremental process, with a known set of tasks to be done, which is what all the templates assume. Rather, it should be the application of a series of mental models to the circumstances of the business, each looking at the business from a different perspective.
It is like looking at a display in a museum. Looking from the front only, you get one view, but go behind, under, above, and you can get a 3D view of the display. Often very different, and ensures that you capture the whole picture of the business.
To continue the museum exhibit metaphor, is the exhibit in a room of its own, is it in a quiet corner with other pieces of no distinct value, or is it in a room full of similar and complementary exhibits. Each will influence the way in which you see the exhibit.
Out of interest, I googled ‘Business plan template’ and got 9.4 million responses in .45 seconds.
Must be important????
Problem is when you look at them, they are all pretty much the same. The words change, the graphics change, but they are essentially a fill in the form and bingo, a business plan.
Might be OK for a bank, but as a document that determines the allocation of your scarce resources to achieve an outcome, it is next to useless.
A template is the easy way.
The hard way is really hard, but is worth the effort,
However, you must have the right ingredients, or the cake will not work.
It is all about the questions you ask, and what you do with the resulting information, intelligence, and instinct.
So, take Alberts advice, which is also the advice of Charlie Munger, Warren Buffets offsider who knows a thing or two about being successful, and who uses Mental Models extensively.
Following are some of the more common ‘Mental Models’ to apply.
Each has its strengths, but none is the silver bullet that those who write books about them claim them to be.
The trick is to be familiar with them so you can run through the models and pick the ones that apply to any given situation.
Most are familiar with SWOT.
We spend time dreaming up items, then filling in boxes, rarely with any useful numbers, rarely anything new, and everything is equally weighted.
Most times, there is as much debate about whether something is a strength or an opportunity, a weakness or a threat, as there is about the strategic impact of the item itself. Many do not recognise the distinction of strengths and weaknesses as being internal to the business and opportunities and threats as being external, and that they are all relative. For example, a strength is really only a strength when it has two distinguishing features: It is something that you do that your competitors cannot do, or chooses not to do, and that it is of value to customers.
SWOT has limitations in fast moving and technically evolving industries, and typically, there is insufficient time given to the consideration of the options that may emerge that offer some degree of differentiation.
In its generic form, a SWOT also fails to weight the factors it identifies, so I do that as well in a different table.
Because SWOT is well known, it often gets a run in the projects I do, almost always in parallel with another that better explains the problems, and offers another perspective. It is a good start to the process because it acts as a catalyst for the more difficult questions, and identification of the cause and effect chains, and eventually to the use of other models that drive a deeper analysis.
Many will be familiar with the 5 forces that shape industry competition first articulated by Michael Porter 30 years ago, and still is a great way to examine the nature of the industry in which you compete.
Bargaining power of suppliers
Bargaining power of buyers
Threat of new entrants
Threat of substitution
The sum of these forces adds up to the state of current competition in any market.
A thorough examination of the forces really surfaces most if not all of the issues that have to be faced.
When you think hard about it, everything can be broken into one or a mix of the forces.
As with SWOT, it suffers a bit in a fast evolving environment, as the searching questions about the future are often missed, but it is extremely useful.
For example, if you are a supplier to supermarkets, this is a great tool to use, as it captures the drivers of the competitive environment, but if you have an idea for a new piece of software, the outcomes of the analysis will be a little less certain because of the more ambiguous competitive environment.
Roger Martin is an academic and widely experienced commercial consultant, who wrote a book a short time ago called ‘Playing to win’ with AG Lafley, who was the CEO of Procter and Gamble.
This sequential process he outlines is a very good framework indeed, forcing difficult choices to be made at each stage before moving on, while encouraging necessary adjustments via the feedback loops.
One of the factors I really like about this model is that it creates a flow, from the macro to the micro, and forces you to make choices all the way. One of the key factors I look for when doing a StrategyAudit for a client is the manner and degree of ‘flow’ that exists in the business.
It is the flow of information, flow of product through a production process, and flow of the planning execution and revision of activities that take place.
The Balanced Scorecard goes back to the mid 90’s, and offers an integrated set of ‘perspectives’ through which to observe, measure and plan the business.
You agree the vision and strategy, then determine the measures of that strategy against the 4 perspectives, and map the interrelationships.
Balanced scorecard analysis can become very complex, particularly as you set out to cascade it through an organisation.
However, It makes absolute sense to look at, and measure the strategies agreed upon from the perspectives of those perspectives impacted by choices made.
The financial performance of the business.
The customers perspective of how the business meets their needs, now and into the future.
The necessary business processes required to deliver value over the long term as well as immediately.
How the business will learn and grow.
It is still widely used, mostly by large organisations with centralised strategic planning functions.
A business plan on one page.
This methodology evolved quite recently out of the ‘Lean Start-up’ movement, first articulated in a book called, surprisingly, ‘Business Model Canvas’. The thinking underpinning this tool is still evolving, and it is still oriented towards tech start-ups, but I really like it for any business as a way to quickly ensure the right questions are being asked, and is to my mind a must use model.
It is designed to be iterative, and its strength is that it is both iterative, and stackable, in that where there are two major customer groups, or product groups in a business you can do two, or even more canvases, and they will all be stackable.
It forces choices to be made, and is iterative in that as you progress, and learn more, you often need to go back and review and balance the choices made earlier.
Generally I do this in a rough order.
- Problem to be solved
- Customer segments
- Value proposition
- Revenue streams
- Key activities
- Cost structures
- key resources
There are many others:
- Ansoff matrix,
- BCG matrix, dogs, stars, that most of us are aware of.
- Options games
- Blue ocean strategy
- Scenario planning
- Jobs to be done
The real point is that there are many ways to plan, but there is no easy way, no silver bullet, and you must get amongst it or fail.
The old cliché: failing to plan is planning to fail is unfortunately correct.
There is no school for fortune telling, unless you join the circus. All these purport to be able to at least remove some of the uncertainty of dealing with the future, but they are all tools, and the value of a tool rests with the skill of whoever is wielding them.
To my mind, using a bunch of them, each with slightly different perspectives offers the best opportunity to remove more of the uncertainty.
However, if I go back to Albert, E=MC2 does predict that time travel is possible.
Much of what he projected is coming true, a bit like Arthur C Clarke, Jules Verne, and others. Perhaps this is Alberts time to become a strategy guru?
I think it is only right to finish where I started, with Albert.
His theories of relativity, that famous formula we all know, but have no idea what it means, explains the workings of the universe. Perhaps it can also give us an insight into the value we can add to an enterprise, which is after all, what we are setting out to do by planning.
In my view, the internet has changed everything about the business models that will be successful in the future. Therefore we have to find a way to recognise the power of digital access and the compounding that is possible by leveraging networks in our planning processes and mental models.
I like e=mc2 because it explicitly compounds the value of networks.
E is the enterprise value, not the stock market valuation, which is only a financial calculation, but the value that is created by the enterprise, which has many forms. Value can be time, services, transparency, design, everyone sees value as being different, and is subject to the context in which it is seen. Apple is the most valuable company on the planet, which has absolutely nothing to do with the fact that they outsource the manufacture and assembly of what has become generic electronic gizmos. The value of Apple is elsewhere than the functionality of the devices.
M is the mass of the enterprise. This is the sum of the physical assets and processes of the business, the stuff that enables the work to be done.
C is the Capital of the enterprise. It includes financial capital, but the greater part is in the capital contributed by the people who populate the place, and this comes in many forms, Intellectual capital, what is between peoples ears, and the relational capital they bring, and the cultural capital, the way in which there is collaboration and alignment of activity towards the creation of value by the enterprise. This is squared, simply because of the geometric nature of relationships, and the network effect, the more you have, the greater the sum of the value that can be created