If it’s not possible to predict the future, why do so many business people try to?
One staple of the business world is the ubiquitous “business plan.” These “plans,” in effect, are a detailed attempt to predict the future by anticipating the environment, actions and results of a company for the next one, three, five or even 10 years. Tell me this: Have you ever met a business plan that has not been reforecast, ignored or forgotten by the time the future it was supposed to predict arrived? Neither have I.
It’s not like these business plans are a broad narrative of the intent or vision of the company. No, the typical business plan endeavors to predict the most detailed minutia of the company’s future operations. Right there printed in black and white are the specific prognostications for such things as sales, revenues, taxes, expenses and profits. And then each of these categories is further broken down into specific details. Things like the number, timing and average sale size; employee count, cost of capital, facilities size and overhead are all there down to the last dollar. Right alongside these numbers are extrapolations for what the internal rate of return on invested capital, total return, shareholder equity and something called EBITDA will be years from now.
I don’t know about you, but it seems to me that if a rational person steps back and objectively looks at this effort they have to ask: Are you kidding me? Who in their right mind would waste their time or put any credence in this type of fortunetelling? (It has been estimated that the cost in time and money wasted on annually developing business plans is greater than the entire GNP of Norway.)
To my way of thinking these business plans are the Tarot cards of the business world. And yet, these concoctions of numerals are used – indeed relied on – by (supposedly) highly intelligent individuals when deciding to invest millions in the operations of a company. Private equity firms are famous for basing a significant part of their investment decisions on the “due diligence” of a company’s business plan. When it comes to start-up companies, venture capitalists have nothing to base their investment decisions on except an out-of-whole-cloth, pie-in-the-sky business plan presented by the entrepreneur. Despite this hocus-pocus sleight-of-hand, investors go forward because the Tarot cards look good and are aligned in the right order. (Or maybe it’s because the PowerPoint presentations are so pretty.)
The Wrong and Right of Business Plans
The real weakness in the traditional business plan process is the failure to acknowledge that getting to the future requires dealing with a multiplicity of possibilities. The only thing static in the business world (other than business plans) is that the world is not static. It is impossible to anticipate what possibilities might become reality and even if that could be done, they do not lend themselves to control.
It is much like the chance of picking a specific set of numbers that will emerge from an infinite number of numbers. In the real world that is called a lottery; in the business world it is called a business plan. No matter how many variable possibilities are planned for, there are an infinite number of possibilities that are not able to be anticipated. This means that the failure of even the most thought out and detailed business plans is about the only thing preordained in the plan.
So what’s the point here? It’s not that you shouldn’t have a plan, but the plan should not be to predict the future, it should be a plan to shape the future. You see, even though it is not possible to predict the future, it is possible to influence and shape it. And that should be the real intent and focus of a business plan.
The best business plan starts with a clear vision of what the company seeks to look like and achieve in the future. This vision must above all be concise, coherent and plausible. Once established the vision must be consistently communicated and staunchly adhered to.
At its founding, the five-year business plan for my company – LifeUSA — was: “In five years LifeUSA will be a national company competing effectively against the largest companies in the industry.” This plan allowed those associated with LifeUSA to live in the future while operating in the moment. Each year the planning process would be predicated on responding to two questions:
- What can we do better this year to improve on what we did last year?
- What can we do this year that we didn’t do last year that will get us closer to achieving our plan?
These questions were not answered by plugging wishful numbers into an evanescent future, but by targeting ideas and actions for the present moment in time that would ultimately produce the numbers. This approach to planning offered the flexibility to deal with emerging possibilities – both good and bad – that could not have been anticipated.
At the end of each year those involved in the management of the company were asked to list five specific actions they would take during the next year that would help LifeUSA move closer to its long term vision of being a national company. Once the numbers for the current year were finalized, that same group would be asked to develop specific actions that could be taken to simply make the numbers better in the upcoming year. Other than for budgeting purposes, there was no specific targeting of numbers; only that they increase from the previous year.
The philosophy behind this approach was simple. If the company consistently improved its performance in the moment at hand, the future would always be better than the present. This type of approach to business planning allowed management to quickly adapt to the multiplicity of possibilities that could emerge at any time, but that never can be predicted. In effect, any unanticipated changes – good or bad – played into the strength of our business plan; rather than destroying it premise and credibility. Unlike other company business plans, we didn’t have to worry about trying to predict the unpredictable. Instead, the LifeUSA business plan process allowed the company to concentrate on doing what we could do in the present, so that we could shape the future.