How to Critique a Business Plan
"Business plans may be great for bankers and investors, but if companies really followed them, you might never have heard of Compaq, Lotus, or Ben & Jerry's." This quote is from "The Best-Laid Plans", an article in Inc. Magazine (February 1987). The article takes some of America's best small businesses and examines their business plans and how useful they have been. Most of the people say they haven't looked at the business plans in a long time and that the plans did not accurately forecast what really happened with the business! One may easily conclude that it's a waste of time to put together a business plan.
Before jumping to that conclusion, you should be aware of a study done at the University of Texas. The study looked at companies that had a formal business planning process, compared actual performance with planned performance, and also measured whether or not they operated according to plan. This study, like the Inc. article, found that companies that had formal organizational plans did not perform according to those plans! However, the companies that did go through formal planning processes performed better than the companies that did not go through a formal planning process!
This study concluded that business plans are not very predictive, but they are preparatory. If the proper methodology is used, the business planning process builds the knowledge of the industry into the management team and board, so that they have a solid information base when faced with changes in the company's environment, In other words, the business planning product is not as important as the business planning process.
Business Plan Components
A typical business plan for a food cooperative usually has:
- A description of the business, including its purpose and strategy
- An analysis of food industry trends
- An analysis of the market and the competition
- An analysis of other key internal and external factors affecting the business, including a historical financial analysis
- A description of how the cooperative will address the major strengths, weaknesses, threats, and opportunities outlined in the analysis
- A description of the market niche the cooperative is after and the products and services the co-op will offer to serve that niche
- A capital, cash, and operating budget, with assumptions
This article's purpose is to provide food cooperative board members a framework for critiquing the co-op's business plan, Including the business planning process. To put together this framework, I interviewed 15 cooperative business leaders and board members; reviewed several artides and books on business plans, and drew on personal experience. The framework based on this information has the following categories:
The people interviewed were asked this question: If you were a board member of a cooperative, what questions would you ask to help you critique the cooperative's business plan?
Direction: Almost everyone interviewed suggested asking a question like: "Is this plan consistent with what we are trying to do?" or "How does it relate to the strategy and long range objectives of the cooperative?" These questions suggest that the cooperative has already set its strategy. If your cooperative has a strategy problem or does not have a clear strategy, see the sidebar on "Strategic I.Q."
Corollary questions are: With reference to our strategy, what does this plan overlook? What was considered and then left out? Why?
If the business plan advocates a significant change from the co-op's past direction, a board member should ask why the cooperative Is pursuing the new strategy.
Your Cooperative's Strategic I.Q.
For those who have not set strategy, Top Management Strategy, by Tregoe and Zimmerman may be useful. The book offers a test of the organization's "Strategic I.Q." This test may be a part of a board's critique of the business plan.
- Has top management determined the nature and direction of the business over the next few years?
- Do you know the specifics of the organization's strategy?
- Do the key managers share the same vision of the strategic direction?
- Is the strategy sufficiently clear so you and the key manaers can readily agree upon what new products and markets your current strategy would include and exclude?
- Is the statement of strategy used for making future product and market choices?
- Are strategic deliberations held separately form your long-range planning efforts?
- Is the strategy determining what you plan, project, and budget?
- Are assumptions about the environment used for setting strategy?
- Is future strategy determining decisions relating to capital improvements?
- Does each department have a clear stated strategy?
- Do the department strategies clearly support the overall cooperative's strategy?
- Is overall performance reviewed on both strategic accomplishment and operating results?
Assumptions: The outcome of projections is primarily determined by assumptions. Board members must find and examine the key business plan assumptions in order to properly critique a business plan. If the board is generally not familiar with the natural foods industry, you may want to hire a consultant who is. For a few hundred dollars, this person could review the business plan and generate a list of questions and comments for the board. The board should Insist that the business plan, especially the financial portion, have a clear list of assumptions.
The Interviewees came up with several questions that fall Into the category of questioning basic assumptions:
How successful has management been at predicting results In previous plans?
How do the projections relate to the co-op's history? How do the assumptions differ from last year's assumptions?
How do the projections relate to industry trends? According to the INC. article, sales forecasts are the weakest feature of most business plans, so board members should spend considerable time examining the market and sales assumptions. Some questions that may help are: What are the market potential assumptions? Does the plan address the total market potential and have an analysis of present and future market share? How much of the sales growth must come by taking it away from a competitor? What are the market cost implications of this? What's the mix of sales increase in terms of 1) number of new customers, and 2) larger average transaction size?
How carefully has the competitive environment been examined? Are any new competitors opening up or expanding? A large supermarket that opens a significant natural and bulk foods department can cut the co-op's volume by 10 or 15 percent.
Pricing and margin assumptions are also critical. If the margin is different than last year, why? Better controls? Better buying? Higher prices? If higher prices, how sensitive are sales to prices?
Organizational Effectiveness Questions
The following questions are adapted from Organizational Dynamics, by John Kotter. The questions are grouped in key activity areas. A board member can use this list of questions to ensure that key aspects of the business have been thought through.
A. The external environment
- Have the key success factors for a natural foods oriented grocery been identified?
- Why are some of the competitors more successful than others?
- Have the major economic, political, and social trends been identified?
- What condition are the assets in?
- How well are the assets maintained?
- What price could each obtain if converted quickly into cash?
C. Personnel and the internal social system
- How do employees feel about the organization?
- What are the norms of the workforce?
- Who is in the "dominant coalition" in the cooperative?
- What goals and plans does the group share?
- How cohesive a group is it?
- How powerful is this group?
D. Decision making
- How effective is the decision making system?
- How efficient is the decision making system?
E. Adaptiveness and Alignment
- How aligned are the organizational components?
- How conducive to adaptation are the structural elements?
- How large are the bariers to improving the organization's effectiveness?
- Is there an important conflict of interest between the organization and its dominant coalition?
Capacity: Does the plan have a realistic assessment of the financial and organizational capacity to carry off these plans? Many times cooperatives have accomplished a wellplanned expansion or move that everyone agreed to, only to find that no one really knew how to operate the store with its new volume. The capacity issue focuses in on financial capacity, on management skill, experience, and depth, and on organizational issues. Some questions Include:
How will the plan be carried out? Is the plan achievable? Will any organizational changes by needed? One food cooperative recently expanded by 50 percent, but left the old decision-making structure in place. The structure was inappropriate for the new staff size, leading to frustration of the workers and significant cost overruns for payroll as a percent of sales.
Are the major threats and most sensitive variables identified? Are appropriate financial reserve mechanisms In place?
Technique: Who wrote the business plan? Who had input and who participated?
You should look into the technique and understand the model that was used. Look at each of those assumptions. The entire board may not be looking at the assumption of each line in the financial projections, but the financial committee or the planning committee should.
What's the database that the figures were drawn from? Are historical numbers used and used correctly?
Several people mentioned that even poor planning Is valuable; it makes people think. The board should concentrate on the "thinking" that went into the planning.
Overplanning can also be harmful. One of the maxims from In Search of Excellence Is "Ready, Fire, Aim", and another is 'Try it, Fix It, Do It". Many cooperatives have faced the "paralysis of analysis", or a "bias against action". The business planning process can be the perfect excuse for peopIe who love Inaction. John Higgins warned about thick business plans full of fluff. Be brief, he says. Also, do not spend much time studying national demographic trends and the big soclo-economic trends. These are the stuff of fluff.
Vantage Points: Several of the interviewees had comments like these: The board perspective Is one the management can't get from being In the middle of It. Management is Involved with the pieces; the board can look at the whole.
Tom Condit mentioned that directors usually do not know as much about the business as management does. The directors should ask lots of questions about the areas they do know something about to determine whether the people that put together the plan know what they are talking about. Mr. Condit notes that this Is a good reason to have a diverse board: someone with knowledge of marketing, another person with a background in finance, etc.
Management: Marsha Krassner, vice-president at the National Cooperative Bank Development Corporation and former food cooperative manager, looks at business plans for a living. Her first comment about business plans was "management, management, management". She mentioned that no matter how skilled the board of directors Is, with poor management the plan probably will not work.
Several people mentioned that If management Is not willing to stay through the time period of the plan, then the board Is in a poor position to assume that the plan can be carried off.
Ben Rosen, quoted In the Inc. article, says that the details and presentation of the plan are not that important in terms of making an investment. Instead, the business plan is reviewed to get a sense of how realistic the managers are about the problems they face, how savvy they are about business, and whether the management team Is any good. Says Rosen, "We're really investing in people."
How to Use This Information: This article and the resources referenced here can be used by a cooperative In several ways. The board may want to review the material and put together the planning process most appropriate for their situation. For example, some cooperatives may want to establish a strategy planning process such as the one outlined in Top Management Strategy.
When putting together the first draft of a business plan, management and staff may want to review the questions and reference materials included In this article. The formal planning process should commence about six months before the board is expected to vote on its acceptance, and the finance committee presented with a rough draft of the plan several months before the adoption date for the plan. The committee can use the questions from this article to probe the rough draft of the document and ask for more Information from the staff. The staff would then conduct the additional research required and redraft the plan, which would be presented to the entire board for perusal. The board may want to refer to the questions and resources at this time. At a future board meeting the final plan would be presented to the board for formal approval.
Listed below are publications, books, and articles that would be useful for management and the board to review and use as resources when building and critiquing a business plan.
- "The Best-Laid Plans," Larson, Erik; Inc. Magazine; Feb. 1987
- Organizational Dynamics; Kotter, John; Addison-Wesley Publishing Company, Reading, Ma; 1978
- Top Management Strategy; Tregoe, B. and Zimmerman, J.; Simon and Schuster, New York, N.Y.; 1980.
- Strategy and Policy; Bates, D. and Eldredge, D.; Brown Publishers, Dubuque, Iowa; 1980.
- Business Planning Guide; Upstart Publishing, Dover, New Hampshire; 1983.