In my previous post, "Five Important Questions Entrepreneurs Need to Ask," I refer to the deficiencies of conventional business planning – at least for the purposes of commercializing innovation. Jeff Fagnan, partner in Atlas Ventures, recently described such weaknesses from his point of view as a seed-stage investor, while serving on a panel at the Kauffman Foundation's 2013 State of Entrepreneurship event:
I happen to think that the business plan is outdated. I think that market validation is not outdated, but the business plan with five years of forecasted financials: terrible.
I actually was on record last year stating that I have never actually funded a startup that had a business plan. Absolutely true.
(Full disclosure: Fagnan made these statements in response to a point I introduced.) He went on to say what he was looking for as an investor – in a nutshell, the major shift the entrepreneur sees in the market and what qualifies the entrepreneur to exploit that shift:
Give me seven slides, tell me about what you're doing, tell me about your background, tell me why you're a domain expert, tell me about the tectonic shift that's happening – that's what I'm interested in.
Why don't more innovators focus on this? In order to commercialize their innovations, entrepreneurs and corporate innovators typically require the involvement of others, such as investors, lenders and executives who can green-light funds; market players and decision-makers who can provide critical skills, resources and stamps of approval; and partners and gatekeepers who control access to customers. When innovators pitch the people whose involvement they need, we often ask them to present business plans; but the business plan as we know it tends to be an exercise in detailed forecasting based on grand assumptions – a pleasant imagining of the future. It's like painting a detailed picture of the sea on a sunny day, as proof that you're ready to navigate those waters. Fagnan illustrated this bluntly in his Kauffman panel remarks:
You show me this hockey stick [a reference to the way the fast rising financial projections one sees in most conventional business plans look on a chart] here with revenue: it doesn't do anything. You tell me about a supply chain that you're going to run in year 7. I don't care.
Fagnan emphasized the way this sort of exercise tends to distract innovators from querying the market in order to understand how customers are likely to respond to an innovation:
I was on the board of the MIT 100K business plan competition for a lot of years, and I said I will not come back until you abolish the fact that it's a business plan. Because you're forcing people to do things, instead of getting real customer feedback, real market feedback. And writing a business plan in a vacuum – it's completely worthless.
The popular methodology that best approximates this querying of the market is what's known as "Lean." Lean's focus on floating trial balloons in the marketplace has been salutary. Yet as it is typically applied, it often leaves entrepreneurs too attentive to function over vision, like Hollywood directors market-testing the ending of a film.
Working to prove your concepts with real users, and being prepared to pivot when the market tells you to change direction, is essential. Yet if you turn constantly on your heel in your effort to give customers what they know they want, you may never uncover what they most powerfully need. Moreover, you are unlikely to identify significant dangling value left when the structure of a market changes; this dangling value can mean the difference between grand slam and base hit innovations, as I have discussed in previous posts. Too often, entrepreneurs who rely on lean methods without tools for setting strategy remain unprepared to make the most of those tectonic shifts Fagnan describes. In the move away from conventional static planning, we can be left without much in the way of strategy.
For a concrete instance that can help illustrate the relationship between responsiveness and strategy, consider the way Google effectively uses a lean approach to test new functionality in its "Labs," introducing half-developed features and throwing them against the wall, as it were, to see what sticks. This has led to some powerful innovations, to be sure. But none of them would mean much if they weren't supported by Google's grand vision and highly deliberate strategy of gaining ever greater access to what each of us is saying, so it can achieve the precise targeting on which its ad model depends, in ways I describe in "Why Google's Business Model Works."
Strategy depends on understanding and exploiting the shape or structure of markets. Yet in many ways, the field of business strategy has moved only incrementally beyond Harvard University Professor Michael Porter's frameworks, popularized among businesspeople in the 80s. These paradigms are elegant and have shaped the way we think about strategy in useful ways. Yet the very characteristic that makes them so powerful – their focus on the structure of industries – has a downside when structures are changing rapidly and those changes are significant. It's like using heavy artillery designed for adversaries dug into trenches when you need to shoot at fast moving guerilla forces. You can use the tool perfectly, but you'll miss the target.
Analysis that over-relies on industry structure has the deficiency of addressing changes to that structure as an afterthought. This can work well when the structure is changing slowly, or when structural change has only a minor impact. But when industries are being disrupted – which means the structure itself is changing radically – this kind of analysis can generate wildly wrong conclusions. This is hardly academic: the history of failed corporate innovation is littered with companies that optimized strategy for the existing structure of the market.
For example, at the very time when smartphones were emerging that made advanced applications highly usable in a handheld context, Blackberry continued to make devices optimized for the simple, secure communications in which it had been a leading innovator. Despite releasing a device with a large touchscreen, in a seemingly panicked response to Apple's iPhone, Blackberry was a laggard when it came to making its platform appeal to third parties developing apps for smartphones. This was reflected in how slowly the number of apps available for the Blackberry grew, relative to those available for the Android and iPhone.
The company's fortunes are now reflected in terms the market understands. But five years ago, Blackberry's devices were still leading sellers, despite the fact that the seeds of its present woes had been clearly sown. I heard many an analysis based squarely on the existing structure of the market, and entirely unwilling to count Blackberry out given the then continuingly high sales of its devices. But to my innovation and entrepreneurship students asking the questions of "Risk Aware Planning in Dynamic Environments," or RAPIDE, Blackberry's future misfortunes were already in the making because changes to the market's structure were underway.
Conventional strategy runs into problems when that structure or shape is shifting significantly. Lean gives us a responsiveness that conventional strategy does not, but tends to throw out strategy's baby with the bathwater. What is needed is a combination of lean methods and strategic course-setting that embraces change and focuses on preparing for it in an iterative fashion. It was to meet this need, under the demands of helping innovators and early stage investors forge successful strategies, that my partners and I devised the RAPIDE methodology. This methodology is almost common sense, in many ways. Yet many innovators fail to discipline themselves to go through the exercise of envisioning alternative seascapes, testing the waters, and preparing to take advantage of various eventualities.
RAPIDE is a way of getting at the second of the five questions I presented in my previous post, and I will elaborate on this in the coming weeks, yet the core idea is simple. Dispense with the conventional business plan with its long range predictions, its reliance on static assumptions about the market, and its tendency to rationalize and defend a model and strategy built around those assumptions. Instead, systematically embrace the potential shifts that would challenge that model and that strategy. Focus on what it would mean if these shifts occurred. And build a dynamic strategy by developing a bold vision for what could happen, testing the market to see what is happening, and positioning yourself to make the most of changes as they occur.
Alejandro Crawford is a senior consultant at Acceleration Group. He teaches innovation, growth and digital strategy at NYU's Polytechnic Institute and Baruch's Zicklin School of Business. He graduated from the Tuck School of Business in 2003.
- Read Adam Thierer: Big Data Collection Has Many Benefits for Internet Users
- Read Jim Lardner: Poll Shows Americans Want More Wall Street Regulation Five Years After the Financial Crisis
- Check out U.S. News Weekly, now available on iPad