A business plan is great once entrepreneurs have tested the market and know what they're going to sell. But for starters, they really need to model their business.
Greg DeRuiter/The State Journal/AP/File
When advising people about what they need to do as they get ready to launch a business, there are two distinct approaches recommended by experts.
The first, which has been the traditional approach, tells aspiring entrepreneurs that writing a business plan is the first critical step.
In business schools the business plan was the core of our entrepreneurship curriculum for decades. Writing a business plan that’s thickness is measured in inches is still a rite of passage in many top entrepreneurship programs.
However, there is a growing chorus of experts questioning why business plans get so much attention. After all, most entrepreneurs will tell you that once the business gets going it can quickly look fundamentally different than described in their original business plan.
Supporters of the business plan argue that although the business plan does not create a good roadmap for a start-up business, it is a good process to help the entrepreneur organize all that goes into launching a new venture.
In recent years, a second approach for getting ready to start a business has emerged. Rather than spending hours and hours perfecting every detail of a formal business plan, this approach recommends you first develop a visual representation of the business model on a whiteboard. The most commonly used tool is the business model canvas developed by Alex Osterwalder in his popular book Business Model Generation.
Advocates of business modeling argue that the early stage of getting ready to launch a business needs to be dynamic and adaptive. Entrepreneurs cannot know what customers really want until they get out and test their business model in the market. Rather than writing a formal written business plan that you try to follow step-by-step, the business model challenges the entrepreneur to get out of the office and gather real feedback from customers that can be used to adapt and pivot the model.
So which approach is best? I actually think that both camps are partially correct.
The business modeling tools are a much better way to get a business started. Rather than entering the market with a clearly defined business plan as if you assume you know exactly what to do, you test your key assumptions with the market to discover a business model that will really work. Using a business model helps you discover the best market segments for your offering, ensures you know what they really want, and helps you understand how to most effectively reach these customers with your marketing efforts.
Not until the business model is fully tested and defined should you even think about scaling the business. But when you are at that point, the business plan becomes another important tool. Writing a business plan at this point helps you start to think about all you need to do to grow the business. However, with a solid business model behind it, the business plan is no longer a work of fiction based on incomplete information and a lot of guesses. It is a plan based on real information from real customers.
Also, as you begin to grow you may need outside funding. The business plan remains the commonly accepted means of communicating about your business with bankers and investors.
So rather than choosing between using either a business plan or a business model, my advice is to do both – first a model, then the plan.