When we read books on starting a business, the advice is always to prepare a business plan. When we study entrepreneurship in schools, the advice again is to start with a business plan. So do government agencies, mentorship programs such as SCORE, and yes, even websites like PowerHomeBiz.
But is a business plan really necessary?
Wall Street Journal published an article questioning whether startups really need to prepare a business plan. From the article:
A study recently released by Babson College analyzed 116 businesses started by alumni who graduated between 1985 and 2003. Comparing success measures such as annual revenue, employee numbers and net income, the study found no statistical difference in success between those businesses started with formal written plans and those without them. The study concludes that “unless you need to raise external start-up capital from institutional sources or business angels, you do not need to write a formal business plan.”
The same question was posed in the study called Pre-Startup Planning and the Survival of New Small Businesses: Theoretical Linkages that appeared in Journal of Management in 1996. The study raised the following real-life examples to support the assertion that business plans are not essential to the success of a small business:
- Apple Computer began as a mail-order business operated out of a garage. Business plans were not developed until after initial mail order successes encouraged the founders to expand operations.
- Fred Smith of Federal Express spent years developing and refining a business plan. But then implemention proved impossible because the Federal Reserve-i.e., the primary customer on which the plan hinged- decided not to go along with it. By then, Smith had already spent millions on aircraft and other plant and equipment. He had to scramble to find alternative ways of pursuing his vision of an overnight delivery service.
- Microsoft burst into prominence, not because of any planned actions, but because its founder, Bill Gates, seized an unexpected opportunity to develop the IBM PC’s operating system.
- A survey of 220 “INC 500” businesses (i.e., relatively small, but among the fastest growing businesses nationwide) revealed that 5 1% did not have formal business plans when they started (Shuman & Seeger, 1986; Shuman, Shaw & Sussman, 1985). Of the 49% that did have plans, an overwhelming majority (70%) generated them, for the most part, simply to get external financing. Furthermore, those businesses without formal plans tended to be more profitable.
This debate is likely to continue. All you can do is to think long and hard whether a business plan is really needed (e.g. the lender requires a business plan) or whether you can think about your business strategy without going through the business planning process.