Five Common Business Plan Flaws

I read with interest this Wall Street Journal article by Dr. John Mullins, an associate professor of management practice at the London Business School. Having seen (and written) a number of business plans over the years, I largely agree with his summary of the five key pitfalls that most business plans fall into. His five points can be summarized as this:

1. Lack of a clearly defined problem

2. Lack of market focus

3. Overly optimistic financial models

4. Overhyping the management team

5. Irrational exuberance

Dr. Mullins prescription for fixing these problems can be summarized in one word  (much-used in his article): “candor’. I agree with this because (1) it shows that the writer has done his or her homework and (2) is willing to have a frank and productive conversation about the concept’s true prospects and critical success factors.

The three main things that raise questions in my mind when I read a business plan are (1) the lack of market focus (2) the notion that no competition exists (and will not exist), and (3) no description of how your business is unique.

I can’t tell you how many business plan writers use big market numbers and then think that they are being conservative by only needing a small share of it to be successful. First, I know that if I define anything broad enough, the market can seem huge. If I want to open a doughnut shop I can describe the market by the number of doughnuts that are bought on a daily basis in my city, region, state, nation, or the world. Or better yet, define it as “breakfast foods” or “meals” and the market looks even bigger! After all anyone, anywhere can come buy my doughnuts on any given day, right? However, a realistic plan would describe the reality that most customers live and/or work within X miles of a shop like this, and my shop is located in a area with certain characteristics, and there is a lack of doughnut shops in that area, etc. Which argument seems more reasonable, more well thought out?

The second issue (no competition) is also troubling. Let’s face it, good markets draw competitors. So, if I’m sitting across the table from you and you tell me that you have a great idea and that there is no competition (and none will be forthcoming), I either don’t believe you or I wonder if your idea is maybe not such a good one. The key is to admit that there already is (or will soon be) competitors and describe how you will be different.

Which brings me to my final point – no uniqueness. If the business plan writer is candid enough to admit that competition exists in their market, then it’s critical to show how their business will beat them. This is fundamental to the  entire business! At its core, what will make your business different and lead to success? Your unique location? Incredible customer service? Products or services that no one else has? A certain way of doing business? Showing that you have spent considerable time and effort considering this all-important question and arriving at a realistic answer will go a long way in the eyes of a prospective investor.

Why are these three areas particularly problematic? First, it demonstrates that the individual isn’t approaching their business realistically enough to seriously study the market in enough depth to really understand it. Secondly, and perhaps more concerning, key decisions about operations, sales, marketing, etc. will be made with these issues in mind. If your market is too broadly defined, your sales team will lack prioritization and will have little success by trying to sell to everyone instead of using a targeted approach. Your brand will appear to have little meaning because it will be designed to try to be everything to everybody. And it will certainly be hard to compete when you can’t differentiate your business from competitors. In short, if you really believe that your market is “huge” and that you will have “no competitors”, then it’s going to be difficult for a prospective investor to see how you will be successful.

Do you agree with these business plan pitfalls? Are there others you would have included? Do you disagree with my assessment? I’d like to hear what you think!

~ by idiscover on June 30, 2009.