Planning: The history, theory, and impact

of of business planning in contemporary

businesses and in business schools:

A critical perspective

Benson Honig Teresca Cascioli Chair in Entrepreneurial Leadership

McMaster University, Hamilton, Ontario Canada

bhonig@mcmaster.ca

2

THE UNTOLD STORY OF BUSINESS PLANNING IN NEW

ORGANIZATIONS

Why plan?

Who plans?

Who doesn’t plan?

Who should plan?

Who should not plan?

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Why plan?

“why plan” is tantamount to asking “why learn”?

Advocates of planning exist at every turn, inhabiting the

political, social, cultural, economic, and educational spheres

theories to guide the potential planning process are virtually

nonexistent

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Why plan?

Humans are not the only species that can be accused of

planning, although we are certainly the most capable (squirrels are pretty good!)

For many of us, plans become the end objective, as opposed to the means of attaining particular goals

a set of objectives for determining potential activities in pursuit of future circumstances currently preferred by actors with resources, or seeking resources, in order to influence specific outcomes (Troub, 1982).

Planning assumes that the future is predictable, linear, and manageable

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Are planning outcomes necessary and

positive?

The pyramids, one of the wonders of the world, took many decades to build, and were obviously well planned activities. Planners would have required precise and elaborate consideration regarding a range of issues including labor, economics, materials, and organizational management.

Is planning an essential component of civilization, technological development, production, organization, and all achievements of any importance? Do we have ‘accidental’ achievements?

The Easter Island Moai construction project, the successful implementation of numerous carefully implemented plans, led to the virtual ecological collapse for the island and its’ people (Wright, 2004; Diamond, 2005)

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Planners

Individuals

Organizations (firms,

NGO’s)

Public Policy Actors

Government (local,

national, transnational)

Multilateral agencies

Methods

Emergent

planning

Short term

planning

Long term

planning

Contingency

planning

Outcomes

Specific a-priori goal

achievement or failure

General a priori goal

achievement or failure

New goal achievement or

failure

Knowledge acquisition

Failed knowledge

acquisition

Moderating

Forces

Mediated by

Institutional norms

Environmental

changes

(including new

actors and

unanticipated

outcomes)

Constraints

Organizational ethos

Limitations due to size

Not invented here (need for ownership)

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Empirical Record

In one study of nascent entrepreneurs, for example, while 72 percent claimed to have done a business plan before starting their business, only 22 percent had written plans they believed to be suitable for formal presentations (Honig and Karlsson, 2004)

many of those that literally wrote their plans on the back of an envelope considered themselves as having planned their activities.

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Theory

Much of the enthusiasm for planning originates in strategic

planning, where it is said to eliminate haphazard guesswork,

help in the interpretation of data, and assist in the

maintenance of organization-environmental alignment

(Armstrong, 1982).

Omitted in much of the business plan discussion in

entrepreneurship is a general criticism towards planning as

found in the area of strategic management (Mintzberg 1987).

Two major theoretical views of strategy contrast the synoptic,

or highly rational proactive process of goal setting, monitoring,

and evaluation with incremental processes that are less

structured and rational (Fredrickson and Mitchell, 1984)

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Environmental Stability In a comparatively static environment, such as the

building of a house, or the re-establishment of a proven project (such as a franchise, or a mature industry) the degree of variability faced by the planner may be limited, and the advantages of using a plan significantly greater (Fredrickson and Mitchell, 1984)

When the environment is subject to rapid changes, such as the emergence of a new industry, paradigm shifts, and new types of competition, the planner faces considerably more challenges (Christensen, 1997; Kanter, 2001)

.

Environmental Stability: Empirical Record

nascents who perceived their competitive environment to be more uncertain, and who asked financial institutions for loans, were more likely to plan than those who did not.

Thus: nascents who ask for funding, facing increasing competitive or operational uncertainty, are more likely to plan – while those facing increasing financial uncertainty and asking for funding, are less likely to plan.

Environmental Stability: Empirical Record we found that those nascent entrepreneurs who indicated

their environment had low financial uncertainty (e.g., was comparatively certain), and who also asked financial institutions for funding, were more likely to plan than those who did not (Honig and Liao, 08)

In more financially secure situations, entrepreneurs appear better able to resist coercive planning forces.

Entrepreneurs who ask for funding, in increasingly competitive circumstances, are more likely to plan than those asking for funding in less competitive circumstances.

entrepreneurs who asked for money and were exposed to increasing operational uncertainty were more likely to plan than those who were not so exposed.

Judging a book by its cover

(Karlsson and Honig, JBV)

Bankers had no way of evaluating business

plans – they were simply

Checking off a box”

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Perspective

Our view (Honig and Karlsson, 2004) is that planning

provides legitimacy and signals reputational conformity, but

does not provide advantages in the actual process of

organizational evolution.

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FIGURE 1

Institutional sources, institutional pressures, and

business planning behavior

Government

agencies

Industrial field Educational

system

Normative Mimetic Coercive

Human Capital Social Capital Demographic

Variables

Survival Profitability

Institutional

sources

Institutional

pressures

Performance

outcomes

Control Variables

Writing a business plan

Institutional

behavior

H1

H2

H3

H4

H5

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Findings: Who is more likely to do a

plan?

having had contact with a business assistance agency,

having taken a business class,

being a member of a business network,

being encouraged to start a business by close friends

and neighbors.

Taking a business class

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.

Equation 1

Equation 2

Equation 3

Dependent Variable Wrote a formal written

business plan

Abandoned by all

during 24 months

Profitable any time during

24 months

Informal Business Plan -.22

(.26)

-.13

(.31)

Formal Business Plan -.77*

(.34)

.15

(.37)

Business classes

Taken

.48†

(.29)

-.25

(.26)

.08

(.30)b

Previous start-up experience .04

(.15)

.003

(.13)

.29†

(.16)

Encouraged by

friends or family

1.06***

(.37)

.11

(.28)

.01

(.32)

Close friends or neighbors in

business

-.40

(.29)

-.24

(.26)

.64*

(.29)

Contact with assistance agency .99***

(.28)

.65**

(.26)

.18

(.30)

Member of a start-up team .44

(.29)

-.23

(.25)

.28

(.29)

Member of a business network .55**

(.29)

-1.46***

(.32)

1.16***

(.33)

Knew customer before starting .15

(.27)

-1.0***

(.24)

3.24***

(.34)

Cox R2 .13 .17 .37

N 396 396 396

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Findings regarding outcomes

Nascent entrepreneurs who completed formally written

business plans, as well as those completing informally

written business plans, were NOT found to be more

profitable

This finding has been repeatedly observed in groups of

nascent entrepreneurs in the USA Sweden and

Germany

Those with formal plans were only marginally less likely

to abandon their business (persistence).

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Findings: success factors

social capital related variables:

Having close friends or neighbors in business

being a member of a business network

knowing the customer before starting the business were all factors that appeared to significantly increase profitability,

and were negatively associated with project abandonment.

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So why do plans?

entrepreneurs may appear more legitimate for having produced an “award winning” business plan,

this legitimacy may be a sufficient return on their psychological and resource investments.

, the b- plan is sufficiently imbedded in our cultural landscape as to be supported by actors and agents in a coercive manner.

Banks, lending institutions, venture capitalists, small business associations, and business assistance agencies all rely upon, and promote, the production and dissemination of the business plan

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Alternatives to planning and education

Honig, (2004) A contingency model of business planning,

Academy of Management, Learning and Education

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Instruction on how

to write an

Entrepreneurial

Business Plan

Entrepreneur

completes a

business plan

Entrepreneur

creates a new

organization

(firm,etc…)

A conventional view of

business planning and

entrepreneurship education Method:

Solutions based on

convergent thinking

Outcomes:

Analytical tools

(cognitive factors)

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Cognitive team

experiences result

in a series of

learning

opportunities

based on failure

Students learn

to maximize

failure as a

learning

experience

Students are

more prepared

for

entrepreneurial

events after they

graduate

Method:

Solutions based on

convergent thinking

Outcomes:

Self confidence

(personal

properties)

Risk tolerance

(motivation)

Leadership and

managerial experience

(cognitive factors)

An experiential model of entrepreneurship education

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Contingency

planning

instruction

provided for

each module

Yes:Bi-pass

Module X

Immediately

pursue

opportunity

Yes: Step #1

Select one of the modules

Ex: Marketing research market A

Modify and

adapt?

Continue as

before?

Select any module,

proceeding thorough

flowchart from START

marketing module A

production module B

development module D

financial module E

human resource module F

Method:

Solutions based on

divergent thinking

START

Should

opportunit

y be

pursued?

Outcomes:

Self Confidence (personal properties)

Risk Tolerance (motivation)

Leadership and Managerial Tools (cognitive factors)

Practical solutions to new problems (cognitive factors)

Organizational development tools (cognitive factors)

Evaluation tools (cognitive factors)

Abandon

Step #2 Select next module

Return to START

Evaluation

Evaluate Progress

Continue as

before?

Modify and

adapt?

Abandon

No

Abandon

YES

YES

NO

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Contingency business plan

activities should be developed that interrelate in an

open ended, dialectic manner, supporting the

development of tacit knowledge and the ability to adapt

and modify a plan, rather than the ability to preconceive

and detail one.

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Contingency planning

In the contingency model of business planning introduced here, there are no direct linear relationships between the different phases consisting of opportunity recognition and exploitation.

Rather than present a linear relationship based on information retrieval, analysis, and decision making,

this model is designed as an open system that can be started from virtually any point in the entrepreneurial cycle.

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Contingency business planning

Unlike the previous two models, students using the contingency planning model are encouraged to pursue divergent thinking (Getzels & Jackson, 1962).

there is no expectation that any or all modules be completed before beginning entrepreneurial activity.

This is helpful in supporting entrepreneurs to act on the moment, maximizing opportunity, as opposed to waiting and deliberating with further analysis

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Contingency business planning

The contingency model utilizes Piaget’s theory of

equilibrium, a dynamic process of incremental

knowledge assimulation.

individuals dynamically and incrementally learn

new approaches to entrepreneurship and apply

them as they make sense in terms of novelty,

appropriateness, and cognitive development

Divergent thinking is encouraged

More closely attuned to effectuation (Sarasvathy,

2001),

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Causation and Effectuation

How does one pursue solving problems – in particular

those that are ambiguous and changing, as with

entrepreneurship?

Causation: take a particular effect as given and focuses

on selecting betrween means to create that effect

Effectuation: takes a set of means as given and focuses

on selecting between different effects that can be created

with a certain set of means

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Causation

A client demands a certain menu, the chef lists the ingredients, has

them purchased, and cooks the meal.

Relies on marketing management – segmentation, targeting and

positioning.

Requires analytical effort – research, resources, strategies.

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Effectuation

The chef looks in his kitchen, sees what is available, and plans a meal according the the ingredients and utensils available to him/her.

Look at the resources available, create an idea acceptable given the constraints (alliance, renting, etc..)

End goal might be vastly different from starting point or original objective.

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Causal decision making

Goal is established

Alternative means identified

Constraints on means

Selection process between the different means takes place

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Effectuation decision process

A given set of means are identified

A set of effects or outcomes are examined

Constraints on effects are identified

A selection process occurs regarding the different available effects

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Theory of effectuation (Sarasvathy)

Affordable loss rather than expected returns – not maximizing returns, but minimizing loss

Strategic alliances rather than competitive analysis

Exploiting unexpected contingencies, not preexisting knowledge.

To the extent that we can control the future, we do not need to predict it.

Dr. Boaz Tamir

Letter to Shai Agassi

“Managing a startup requires the ability to make sharp

turns. It's a learning process that goes through a series

of trials and market checks in direct contact with

customers. The plan has to be replaced with planning

that includes a series of hypotheses that require

confirmation or a bold change of direction ”.