Business Plans, Beliefs, and a third word beginning with B

There’s an entire complex rooted on the idea that business plans are intelligently designed.

Let’s probe that idea a bit.

I enjoy Eric Beinhocker’s ideas about complexity economics. I’ve written of his ideas again and again and again. One of the most polarizing talks I’ve ever given was centred on his idea of a Library of Smith. It’s the idea that every single business plan that has ever been written, will ever be written, or can ever be written is contained in an imaginary library named after Adam Smith. Somewhere in this library is the elusive Google Business Plan from 1999. There’s also GE’s business plan for 1956. And another business plan with the letter ‘A’, repeated 99,000 times. I love the thought experiment. I understand why so many wouldn’t.

Central to Beinhocker’s book The Origin of Wealth (2006) is the idea that one assumes a competent management team. Send them a business plan from this library, and they either generate wealth or they won’t. Isn’t it a lot of fun to imagine a competent management team trying to make sense of the letter ‘A’ repeated 99,000 times?

A business plan is a lot like a genetic code, and a management team is like all the apparatus outside the nucleus. Take out the nucleus of a cell and put into another one, and it’ll just work out fine. All the instructions are all there, encoded. All the machinery for managing the information in the nucleus is all there. The management team, in this thought experiment, are a lot like all the other parts of the cell. I used to think of them as ribosomes.

This may all be very ugly. But it’s useful.

His idea helps the analysis of business plans as a unit of analysis. Just for this experiment – hold the management team constant. Undifferentiated people to do undifferentiated things. Hold management constant. Now vary the business plan and see what happens.

So what might we see?

Even though the range of possibilities is infinite – there’s a fairly small subset of dominant design patterns that appear in nature.

Many people in technology are introduced to business planning through Swiss business theorist Osterwalder. It’s where the idea of a business model design canvas comes from. If you click around Switzerland enough you’ll find St. Gallen Business Model Navigator (Gassmann, Frankenberger and Csik) and 55 business model design patterns. Both frameworks offer a way for all the language contained in a business plan can be clustered.

Who are the customers? What do they get? How is what they get made? Who pays? How do they pay? Who are the competitors? Who are the suppliers? These aren’t the only dimensions of competitive differentiation, but they are the most common.

Once those questions get answered, a bunch of considerations from Michael Porter can come in, and in tech: Christensen, Fader, McCarthy, Ayn Rand and Machiavelli. What are the technological trends? What is happening with the bargaining power of suppliers? The bargaining power of customers? How many competitors are there and how do they differentiate? How do we position ourselves against the competitive set? Do we need to capture the state to secure the Ayn Randian right to reduce competition through competitive consolidation and destroy the ability of any group to organize?

These patterns are so common that many business plans can be compressed into just three words.

Uber for Real Estate. Facebook for Dogs. AirBnB for Offices. Netflix for Documentaries. All real business plans that existed both in the Library of Smith and found their way out into to the real world! All tea no shade.

That nature should create so much similarity, even independently, shouldn’t be all that surprising. It isn’t all imitation. It might not all be fast follow. It’s just environmental pressure.

Flight was independently discovered by multiple branches of insects, reptiles and mammals. The environment selects for that kind of locomotion. Flight increases the available feeding zone. Genes are hungry. Genes are propagated by animals are shaped by their competitive environment over generations.

So too with business plans.

It’s just that the rate of reproduction is so much faster in a business plan than genes.

We are human, masters of language and the ideas and memes in language. Humans can sense a competitive change and can imitate it in hours. We can adjust to changes in the environment quickly. Part of the beauty of Beinhocker is the core insight that we can evolve much faster than animals.

How Are Business Plans Created?

If a business plan is a genetic code, how is it created? How does it emerge into being?

If we continue the thought experiment, under the assumption that all management teams are undifferentiated and are executors of business plans, then one could reach an inevitable conclusion: the environment creates business plans. The environment selects winners and losers and shapes the set of viable business plans. One could carry on by asking questions what is it about the the environment that shapes survivability.

This environmental line of inquiry is often of interest to political economists and those obsessed with public policy. What is it about Canadian and American environments that causes children to spontaneously set up lemonade stands? And what is it that keeps public opinion appropriately enraged when some NIMBYite complains about it? What is it about homophilic network effects, public relations pronouncements of equity that causes capital allocation to manifest in the way that it does? Why do communitarian education efforts like Junior Achievement persist? Why are some politicians and regulators so affordable to buy and the state seemingly so prone to capture? These are all collective narratives that are very interesting but perhaps disempowering. So let’s pivot to the individual instead.

There could be a perspective that a business plan is an artifact of self-authorship. Let’s take the most extreme view of that.

A solo founder is a management team and a board of one. A solo founder is the embodiment of the corporation themselves. They are are both the governor and the governed.

Assume the founder has a business thesis. All a startup really is a search for evidence that the thesis is true. The type of business plan they could produce would resemble more a set of questions and a set of branching instructions for going about answering those questions. The way of doing it with the least risk is to order the assumptions in order from riskiest to least risky and proceed solving the mysteries in order. Such a procedure introduces doubt.

Often a solo founder assumes that their thesis is true, and goes about describing the plan as though it is assumed that it is true. They have to have an unwavering belief that they’re right. One Toronto Venture Capitalist remarked that you had to be crazy and confident to even consider launching a tech startup. Belief and confidence go hand in hand. The thing that gives the founder the strength and confidence to try can also limit their ability to learn.

Hinton once described the situation as a basic truth table. Either you’re right or you’re wrong. Either you’re skilled or you aren’t. If you’re right and skilled, then you win. If you’re wrong and skilled, well, you took your shot. And if you’re unskilled, it doesn’t really matter either way. So you might as well try and find out. (There’s something deliciously dark about Hinton’s idea about finding out if you were wrong or if you were just unskilled.)

A solo founder/corporation creates the business plan. If they’re very lucky the environment selects them as a winner. If they have a stance that enables them to change the plan in response to information that contradicts their beliefs, then they improve their chances of having the environment selecting them as a winner. But that is very tricky. They receive so many signals about their plan, and not all of them are equally valuable or worthy of belief.

Under that set of assumptions, the founder is co-creating the business plan with the environment.

Group contexts are harder to parse. Different groups of people in a network are going to interpret signals from the environment at different speeds and different sensitivity. Arrow lurks in the shadows. Generating an environment that’s safe enough for collaborative sensemaking is an entire post in its own. And under that set of assumptions, a group of people, a troupe, co-creates the business plan with the environment.

A Third Word Beginning With B

I used to write enormous business plans. The longest I ever wrote came in at around 120 pages. I had evolved the standard Business Development Bank of Canada template to include loads of additional detail. It was an absolute monster, featuring an evolving brand key, a full section on persona-based keyword mining, the results of a full blown simulation estimating the impact of square footage on productivity, and a sorted list of assumptions that needed to be true for the startup to become a business. I thought I was so well prepared.

Because I had spent the time to really imagine what could go right and what could wrong, I found it easier to operate as I was undifferentiatedly executing the plan . In those moments of absolute mental exhaustion, I could always go to the plan and remember just what I was thinking, kind of like an echo of myself. And it was useful.

And it restricted my flexibility.

I wouldn’t advise writing out a 120 page business plan and then executing it. I’d sooner write a half dozen pages enumerating the riskiest assumptions and outstanding mysteries. And I’d probably spend a lot more time figuring out how to assess the cheapest way to assess if there’s signal.

I might advise writing out a longer business plan as a set of decision trees and scenarios. What would you do if your target market is too big? What would you do if your target market is too small? What would you do if a well funded fast follow starts nipping at your heels? These are good scenarios to think about. If they scare you, it’s always best to work through that fear now before you get into the thick of it.

Conclusions

Are business plans intelligently designed?

Maybe. Probably not always.

Some business plans evolve. They’re shaped by their environment. They’re shaped by the culture of their cell.

Some business plans are like colouring books. There are big bold lines that nature strongly suggests that you colour inside them. Ultimately those are just suggestions. You could sort of know why you’re colouring outside the lines while you’re doing it, if you wanted to.

If it’s important to believe that they’re intentionally designed, then there is nothing wrong with that belief at all. Just remember to be a bit flexible as uncertainty is tossed at you.

I couldn’t think of a third word beginning with B that fit.