CHAPTER 17
Everybody Knows the Future
(Is Planning Overrated?)
Planning Is Not Important
When entrepreneurs come to me for financial assistance (like capital investments), I ask them to provide me with their business plan, but not the one that predicts the future because everyone “knows” the future. I ask them to show me their business plans from the past 3 years and I review how they fared.
If their results are compatible with their predictions, I have a higher confidence level that they will achieve future predictions. On the other hand, if they show poor compliance with their past planning targets, this might be reflected in their “future” business plans too.
The bottom line: A business plan is not written for outsiders unless they are gullible or ignorant of past performance. A business plan is a guide for company management and its board. It identifies what needs to be achieved—irrespective of what outsiders (like lenders) expect.
Of course, some business plans are written for outsiders (the banks or investors) to secure financing or raise capital. Regretfully, they most often represent wishful thinking rather than reality. Those who end up reading those business plans also expect some background information supporting the predictions. The planning process is important because it motivates management to do proper market research and develop some future direction for the company. The direction of a corporation may change, but at least direction exists. Planning makes it possible to realize potential and avoid potential problems.
My rule of thumb: 3 to 5 percent of business plans are worth reading. One in 10 of those is worth pursuing.
Past performance mirrors the future.
Why the Past Counts?
Most experienced managers consider intuitively that planning is an important element in securing business success. Some business researchers go even further, claiming, “Strategic planning is one of the most critical means of fostering the success of an institution and the achievement of its vision, mission, and strategic goals.”63
Is this the reality for small- and medium-sized businesses, which are the typical business environments of starting entrepreneurs?
Benson Honig (the Teresa Cascioli Chair in Entrepreneurial Leadership at Canada’s McMaster University’s DeGroote School of Business)i wrote,
When I pointed out a number of highly successful firms that started without business plans—Bill Gates at Microsoft, Steve Jobs at Apple, to name just a few—I was told that these were the exceptions that proved the rule. Unconvinced, I began asking successful entrepreneurs who visited my classroom if they wrote plans, and how important they were. Perhaps 90 percent of them confessed they didn’t start with a plan, some never had a formal plan, and others indicated they wrote one for a bank or investor further down the road, once their business was already up and running.
Benson Honig argues, “While, at times, we find that planning leads to persistence, we have found no evidence of it leading to profitability or other measures of success.”64
Most university MBA programs teach planning as an important management process; whether it works or not depends on the managers, their vision, and their resources. Planning suggests reaching a goal on purpose and with meaning.
Of course, when banks or lenders and investors ask for a business plan, the company must comply; otherwise, they might refuse to assist it financially.
If you have a plan, you might achieve it. If you do not have one, you already missed it.
What Is Planning?
What is planning? What kind of planning is necessary? How does one go ahead with planning?
Broadly described, two types of business planning are most common. First, the long-term plan, usually in the 3- to 5-year range, and in some circumstance even more. The long-range planning process is often called strategic plan. The strategic plan defines the objectives and goals of the company. It is the platform from which short-range plans are made. Strategic plans need to establish the organization’s purpose. They are supposed to provide clear statements of where the organization is going.
James Heskett, a Harvard Business School Emeritus Professor, argues that, [l]ong range planning, while necessary for organizational success, must be adaptable to the competitive environment.65
The second type of planning is short-term plan, which is a projection of the company’s activities that cover no more than a year.
Short-term plans are based on long-range plans. The annual budget is an example of a short-term plan. It defines the company’s financial objectives for the coming fiscal year. A budget is usually divided into quarters and is used to guide and control day-to-day activities. Another kind of a short-term plan is a tactical plan setting priorities and allocating human, material, and financial resources to specific company activities over the coming 12 months.
Furthermore, we distinguish various types of planning methods: like plans for times of crisis (contingency or DRPs); plans based on timelines (very short-term or very long-term plans, mostly associated with projects); plans connected to types of use (single-use and multipurpose plans); and plans focused on pragmatics and specific objectives (operational and tactical plans for company departments like marketing, research and development, and manufacturing). In those planning mechanisms, a plan is expected to consciously define a process for guiding the company’s activities over the time frame covered by the plan.
Do these plans lead to the “analysis paralysis” syndrome? Does overplanning prevent action? These are potential planning errors that need to be avoided.
An interesting example would be to compare the North American business planning process to that of the Japanese planning process.
When comparing the Japanese business planning methods with those of their American business counterparts, Milton Lauenstein (a retired business executive and adjunct professor at the College of Business Administration at Northeastern University) found that Japanese planning processes differed in both approach and spirit. His analysis of the Japanese business culture helps to explain this phenomenon.66
First, employees in large Japanese firms tend to remain with the company until retirement, which ensures that those employees have in mind the long-term success of the company.
Second, company prestige is deemed more important to the Japanese than profitability. To achieve prestige, managers tend to focus on opportunities for innovation informed on a case-by-case basis rather than predetermined strategic planning principles.
Finally, Japanese managers recognize that a competitive advantage can be short lived; therefore, companies must constantly reevaluate their strategy to maintain success.
In summary, Lauenstein argues that Japanese CEOs tend to have more of a long-term vision than their American counterparts. Japanese CEOs are focused on bold choices and clear company goals developed with management involvement at every level. The company then identifies a wide range of strategies to achieve this shared vision, which is not based on established and predetermined strategic principles.
The drawback of this approach is the very long time it takes Japanese companies to develop their plans.
While both American and Japanese companies practice strategic planning, their cultural assumptions differ, which results in a different approach to defining and realizing the planning process. Organizational culture is thus critical in determining the range of planning options within each planning type.
Ana Pacios, from Carlos III University (Madrid, Spain), conducted an analysis of plans freely available on university library web pages to identify differences between “strategic” and “long-range” plans.
These planning terminologies emerged during different historical periods. Long-range plans date to the 1950s and 1960s when international economic development resulted in 4- and 5-year plans; strategic plans date to the 1960s, coining a term used by the military; and strategic management emerged during the 1980s as an internally focused evolution of the strategic plans, which had an external emphasis.67
A business plan is foremost for management.
Lessons Learned: Planning?
Despite differences in the definitions of plans (or names) and the period when they were introduced, Pacios states that no significant differences exist between public library plans called “strategic plans” and those called “long-range plans.” Over time, those two types of plans have become increasingly interchangeable, despite the need to regularly modify strategic plans, possibly in the short term, to respond to market conditions.
Dr. William (Bill) Bozeman, a business consultant specializing in client satisfaction, states: Strategic planning is essentially a process that enables an organization or a unit within an organization to chart where it is going over the next three to five years, how it is going to get there, and how to know if it, in fact, got there.68
Let us go back a bit to Alice in Wonderland, a story some of us enjoyed in our youth.69
Alice asks the Cheshire cat:
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the cat.
“I don’t much care where—” said Alice.
“Then it doesn’t matter which way you go,” said the cat.
“—so long as I get somewhere,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the cat, “if you only walk long enough.”
Would it not be great if we could apply this approach to business? Being able to “walk long enough” would mean having the resources to continue doing what we were doing so far.
Of course, if we continue doing the same thing, we will end up with the same results, won’t we?
If you know where you are going, whatever route you take will eventually lead you to your destination.
iBenson Honig is a professor at the School of Business of McMaster University. His research interests include social and human capital, business planning, transnational entrepreneurship, nascent entrepreneurship, social entrepreneurship, and entrepreneurship in environments of transition.