No Plan Survives First Contact With Customers – Business Plans versus Business Models

I sourced this from Steve Blanks great website.

I thought it relevant and compelling for any Service Business with Customers (that would be everyone except startups) because instead of holing in up in your apartment like a entrepreneur, organisations display similar behaviours. They write marketing plans, spend advertising money and all the time with expensive segmentation studies under their arms, they seek to connect with their most important customers.

The issue with that is that customers never act or respond in the way you expect them to. They are ungrateful for the things they will be appreciative of and the smallest thing which you almost didn’t implement receives rave reviews.

Why is this? Because humans are complex and most people structuring the interactions with their customers live nothing like them. They earn more, live in different suburbs, are probably more educated and make too many assumptions about how easy or simple their service is.

That’s why the advice in the following article is so important for not only start-ups, but for more established companies too.

That’s where using a Service Design approach whereby you first spend time really listening and understanding customers is so important. The value isn’t in the hours spend listening and writing (most research firms can do that) to your customers, its in the ability to not only synthesize that information, but then design a better way(s) to deliver it so it makes sense for customers (desirable), operations (feasible ) and Shareholders (financially viable).
Enjoy.

For more information on how to embrace customer contact, give Proto Partners, Australia’s leading  Service Design consultancy a call.

No campaign plan survives first contact with the enemy
Field Marshall Helmuth Graf von Moltke

I was catching up with an ex-graduate student at Café Borrone, my favorite coffee place in Menlo Park. This was the second of three “office hours” I was holding that morning for ex students. He and his co-founder were both PhD’s in applied math who believe they can make some serious inroads on next generation search. Over coffee he said, “I need some cheering up.  I think my startup is going to fail even before I get funded.” Now he had my attention. I thought his technology was was potentially a killer app. I put down my coffee and listened.

He said, “After we graduated we took our great idea, holed up in my apartment and spent months researching and writing a business plan. We even entered it in the business plan competition. When were done we followed your advice and got out of the building and started talking to potential users and customers.” Ok, I said, “What’s the problem?” He replied, “Well the customers are not acting like we predicted in our plan!  There must be something really wrong with our business. We thought we’d take our plan and go raise seed money. We can’t raise money knowing our plan is wrong.”

I said, “Congratulations, you’re not failing, you just took a three and a half month detour.”

Here’s why.

No Plan Survives First Contact With Customers
These guys had spent 4 months writing a 60-page plan with 12 pages of spreadsheets. They collected information that justified their assumptions about the problem, opportunity, market size, their solution and competitors and the their team, They rolled up a 5-year sales forecast with assumptions about their revenue model, pricing, sales, marketing, customer acquisition cost, etc. Then they had a five-year P&L statement, balance sheet, cash flow and cap table. It was an exquisitely crafted plan. Finally, they took the plan and boiled it down to 15 of the prettiest slides you ever saw.

The problem was that two weeks after they got out of the building talking to potential customers and users, they realized that at least 1/2 of their key assumptions in their wonderfully well crafted plan were wrong.

Why a business plan is different than a business model
As I listened, I thought about the other startup I had met an hour earlier. They also had been hard at work for the last 3½ months. But they spent their time differently. Instead of writing a full-fledged business plan, they had focused on building and testing a business model.

A business model describes how your company creates, delivers and captures value. It’s best understood as a diagram that shows all the flows between the different parts of your company. This includes how the product gets distributed to your customers and how money flows back into your company. And it shows your company’s cost structures, how each department interacts with the others and where your company can work with other companies or partners to implement your business.

This team had spent their first two weeks laying out their hypotheses about sales, marketing, pricing, solution, competitors, etc. and put in their first-pass financial assumptions. It took just five PowerPoint slides to capture their assumptions and top line financials.

This team didn’t spend a lot of time justifying their assumptions because they knew facts would change their assumptions. Instead of writing a formal business plan they took their business model and got out of the building to gather feedback on their critical hypotheses (revenue model, pricing, sales, marketing, customer acquisition cost, etc.) They even mocked up their application and tested landing pages, keywords, customer acquisition cost and other critical assumptions. After three months they felt they had enough preliminary customer and user data to go back and write a PowerPoint presentation that summarized their findings.

This team had wanted to have coffee to chat about which of the four seed round offers they had received they should accept.

A plan is static, a model is dynamic
Entrepreneurs treat a business plan, once written as a final collection of facts. Once completed you don’t often hear about people rewriting their plan. Instead it is treated as the culmination of everything they know and believe.  It’s static.

In contrast, a business model is designed to be rapidly changed to reflect what you find outside the building in talking to customers.  It’s dynamic.

“So do you mean I should never have written a business plan?” asked the founder who had spent the time crafting the perfect plan. “On the contrary,” I said. “Business plans are quite useful. The writing exercise forces you to think through all parts of your business. Putting together the financial model forces you to think about how to build a profitable business. But you just discovered that as smart as you and your team are, there were no facts inside your apartment. Unless you have tested the assumptions in your business model first, outside the building, your business plan is just creative writing.

Service Design – another word for “R&D for the rest of us”

This is just a great post by Jeffrey Phillips from Innovate on Purpose. he points out and with support from Gary Hamel, that most companies have a product innovation pipeline covered, however few have business model or service innovation or Service Design plans underway. Which seems crazy when so much more value can be created in these areas versus product innovation.  Please enjoy his article, he makes a really important point I believe

Something happens when you put on a lab coat and safety glasses. You have the immediate ability to explore concepts and ideas that may, or may not, become new products. And your time horizon shifts dramatically. Many people in primary R&D are examining technologies or molecules that won’t become products for many years.
“R&D for the rest of us”

The question we as innovators should ask ourselves, and our companies, is: why is this kind of thinking and investment committed solely in technology R&D? Why, in a pharmaceutical company, is there a team that is actively investigating new compounds and molecules that may become new drugs, but no one that is actively investigating new business strategies, new organizational hierarchies, new management philosophies? Why is innovation confined to the “R&D” wing of the business, and walled off from all the other things we do to add value to a business?

Certainly, R&D in a pharmaceutical firm is very important. It offers the chance for the discovery of a “blockbuster” new drug that could cure diseases or extend the life of seriously ill individuals. But I think we can all agree that a pharmaceutical firm (and by extension, any firm) adds tremendous value beyond primary product or service research. There are opportunities to dramatically innovate the business model (which health care reform may require), process or service delivery, customer experience and so many other factors or functions of the business. It’s as if all critical, exploratory thinking is confined to R&D, while the rest of the business is restricted to cost-efficient, process-oriented, short term thinking.

Where are the guys and gals in lab coats who are researching the long term disruptions of their business model, or service delivery model? Who is responsible for thinking about and generating new ideas about the relationships a pharmaceutical firm has with physicians and hospitals? Don’t you think these relationships and experiences are likely to change over time? Can we safely assume that these functions will remain the same over time, and all we have to do is find ways to cut costs? Just as Travelocity and Expedia decimated the travel agent industry, could other similar offerings radically change the interaction between a pharmaceutical company and its customers?

Gary Hamel points out in The Future of Management that most firms have some measure of product innovation underway at any point in time, and may have some inkling about service innovation or customer experience. Few, if any are innovating around business models or organizational structure, yet these are the places where competitive advantage is sustained over the long run. It’s time to assign a few more people to lab coats and safety glasses, and have an R&D team investigate all the aspects of the business where we believe we can add value. Just like Festivus, innovation is R&D for the rest of us.

Orange UK Open Innovation Challenge – The Next Orange Wednesday?

Have you seen this?

Orange UK Open Innovation Project

It’s a clever and innovative approach to generating service innovation and potentially Service Design for Orange in the UK. I thought readers of this blog might find using methods such as co-creation and collaboration to grow new streams of revenue of some interest. It is relatively unique and reminds me of trying to find the next “Orange Wednesday”  http://web.orange.co.uk/p/film/orange_wednesdays

Orange UK are looking for start-up businesses that they can partner with to provide more compelling online and on-phone services that increase their audience Open innovation project.

The project (OSCR) is an open innovation project that is being run as a collaboration between:

  • NESTA (The National Endowment for Science, Technology and the Arts)
  • Orange UK and
  • in partnership with live|work www.livework.co.uk ( a leading UK Service Design firm) and Wireless Innovation ( Satellite and Wireless solutions)

The project is based on the underlying concept of “shared risk and shared reward” and aims to demonstrate how Corporates can work with partners outside of their organisations on a mutually beneficial basis. As this is a call for innovations in services (which are difficult to patent), Orange are aiming for an ongoing business relationship with Orange that can embrace a range of different business models, including licensing, joint ventures or other forms of partnership.

Responses to the brief will then be submitted to the “Trusted Agent Team” (NESTA, live|work and Wireless Innovation) who will select the most promising to enter the “airlock”. It is important to note that Orange will not see any ideas at the selection stage and will not see any ideas until they leave the “airlock” (Trusted Agents will act on Orange’s behalf). Companies selected to enter the “airlock” will receive funding and support from the Trusted Agent Team to develop, protect and present their idea. After leaving the “airlock”, they will pitch their ideas to Orange who will then have 90 days to decide which ideas to pursue further. After this “right of first refusal”, those ideas that Orange rejects remain the intellectual property of the originator.

OSCR will launch on October 22nd, when companies interested in submitting ideas can meet with representatives from Orange to further understand their requirements. For more information on the project, please visit www.oscrproject.com

Enjoy! If you would like any information on leveraging Customer Experience to improve your engagement and profitability of your  customers please feel free to contact  me directly at damian.kernahan@protopartners.com.au or go to www.protopartners.com.au