Business Plan or Business Model: What’s the Difference?
I often hear entrepreneurs say, “I don’t have time to write a business plan.” Sometimes they even trot out the words of business experts like Guy Kawasaki or Rob Adams or Steve Blank who likewise don’t advocate creating business plans. However, I think the intent of Kawasaki and Adams and Blank gets twisted because many first-time entrepreneurs don’t understand the difference between a business plan and a business model. Is there a difference? You bet there is!
In essence, a business model is the description of how a business is going to make money. It takes the basic moving pieces of a business, like the product offering, the target market, the revenue streams, the distribution channels, the available resources, etc., and puts them together in a combination that results in a profit for the company. Sometimes a company puts together a business model that places a particular product in a particular market at a particular price and the model won’t work—maybe the price point is too high for the target market or the distribution channel chosen requires a partner that cannot be recruited. Whatever the reason, the model may have to be tweaked (a “pivot”) in order to find another way for the company to make money.
So why would an entrepreneur ever bother writing a business plan? Isn’t a business model good enough? All anyone cares about is how the company is going to make money, right? Wrong! A business plan takes the business model and fleshes it out. If the business model is the skeleton of a company, the business plan is the muscles and skin. Once a model is developed that seems to work, a plan builds it out by adding the details of the management team and staffing needs, the marketing plan, the financing requirements, the operating plan, the intellectual property situation—more of the day-to-day aspects required to make the model work. A business plan tells the story of a company and how it plans to get from where it is to where it wants to be. This story is used to convince investors to invest money into the company, to recruit top management talent to join the team, to persuade critical partners to enter into agreements, and more. It lays out the whole story so everyone involved with the company can understand the big picture as well as the fine details.
Now, I do agree that a full-blown business plan doesn’t always make sense. A plan created simply as an exercise rarely has value. This is why business plan competitions at universities don’t usually result in company creation. If there is no reason behind the plan other than winning a competition, then there is no real purpose for implementation. And sometimes an inexperienced entrepreneur gets so caught up in planning his business that he never gets out into the market to really discover whether the plan he is creating will ever work. Writing a business plan prior to exploring the business model options is a waste of time. But writing a business plan after identifying an appropriate business model is critical. There is an old saying that if you don’t know where you’re going you’ll never get anywhere. Don’t put your business on a fast track to nowhere. Take the time to explore business models that make sense, then pick one and take the time to write a compelling 25-page business plan to guide the company to where it needs to go. I say 25-pages because that is typically long enough to have enough detail yet short enough to force the entrepreneur to be concise and to the point. A short plan is also easier to modify when new information is discovered and models need to be changed. A business plan is a living document that should be revisited on a regular basis—annually in established companies, monthly in startups. If a business plan is written then put on a shelf and never looked at again, it has no value and its creation was a pointless exercise in writing.
A business plan must be the result of working through several different business models that are based upon feedback from customers, partners, investors, and others. The business plan is like the detailed roadmap that let’s everyone know how to drive the company to success. It lays out the important stops on the way to success and tells everyone what they have to do in order for the ride to be smooth and fast. But at some point you have to quit planning the trip and just hit the road. And no matter how well you planned, there are going to be detours, closed roads, flat tires, and other unforeseen situations that will cause your best-laid plans to have to change on the fly. That’s entrepreneurship!