Despite the majority of the advice out there being that you should put a business plan in place, a lot of businesses seem to push back on the writing of a plan, thinking the time they spend on it they would rather put towards actually working on growing the business. Until now there’s been no evidence that it proves your chance of success, but due to the frustration of businesses not taking the planning side of things seriously, the University of Oregon decided to conduct some academic research on business planning - the actual science around it and how it impacts both start-ups and existing businesses. This study, mixed with several others below, clearly shows the benefits of getting started on that business plan.
So let’s just get straight in to the research; it shows that it’s really not a “write a plan” or “don’t write a plan” conversation. What really matters is what kind of planning you do and how much time you spend doing it.
One study, published in 2010, aggregated research on the business growth of 11,046 companies and found that planning improved business performance. Interestingly, this same study found that planning benefited existing companies even more than it benefited start-ups. Why would planning help a business that has a few years of history more than one that is just starting up? Well the existing business probably knows more about their customer than a start-up would. Existing business planning strategies would be based on more information
Another study found that companies that plan grow 30% faster than those that don’t plan. To reinforce the connection between planning and fast growth, yet another study found that fast-growing companies—companies that had over 92% growth in sales from one year to the next—have a business plan in place. In fact, 71% of fast-growing companies have plans. They create budgets, set sales goals, and document their marketing and sales strategies.
Business planning is not an activity you undertake only when you’re getting your business up and running. It should be something you return to, time and time again, to revise and improve upon based on new knowledge. You also need to be held accountable to it somehow.
However, just having a plan doesn’t guarantee faster growth, it’s the kind of plan and how you use it that really determines the increased success.
Studies show that start-ups, especially ones building highly innovative businesses, should create shorter, less detailed plans. That’s because these innovative start-ups are learning new things about their product and customers at a very fast pace and their strategies change more frequently.
Meanwhile, more established companies know a lot more about their products and customers and can craft more detailed strategies that are less likely to change as quickly. For these companies, more detailed planning is generally more helpful.
What you include in your plan is important as well. The same study as above also found that companies that did a good job defining their value proposition do even better than companies who have a hard time defining their customers’ needs.
These researchers also found that having a plan is less about accurately predicting the future, and more about setting regular goals and making changes to your business as you learn more about your customers.
Being prepared matters when you’re seeking funding, research shows that how well an entrepreneur is prepared directly correlates to their chance of leveraging funding. Not only will business planning help you be more prepared, it will improve your chances of getting funded. A study at the University of Oregon found that businesses with a plan were far more likely to get funding than those that didn’t have a plan.
Starting your business plan early is important too, research shows that entrepreneurs who started the business planning process early were better at what the scientists call “establishing legitimacy.” Entrepreneurs that did a good job of using their business plan to “establish legitimacy” early were more likely to succeed and their businesses tended to last longer. Not only that, starting the planning process before starting marketing efforts and before talking to customers reduces the likelihood that a business will fail.
A study published in Small Business Economics found that entrepreneurs that take the time to create a plan for their business idea are 152% more likely to start their business. Not only that, those entrepreneurs with a plan are 129% more likely to push forward with their business beyond the initial start-up phase and grow it. These findings are confirmed by another study that found that entrepreneurs with a plan are 260% more likely to start their businesses.
Having a business plan can reduce your risk of failing too. Yet another study of 223 companies found that having a plan reduced the likelihood that a business would fail. Having a plan and updating it regularly means that you are tracking your performance and adjusting as you go. If things aren’t working, you know it. And, if things are going well, you know what to do more of.
It’s awesome to see research back up these common-sense assumptions. The research also validates the idea that the value of business planning really depends on how you approach it. Start with something lean, a simpler form of planning where you can start by documenting your business concept on a single page. Develop from there!
Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms. Journal of Business Venturing, 25(1), 24-40. doi: 10.1016/j.jbusvent.2008.10.007
Burke, A., Fraser, S., & Greene, F. J. (2010). The multiple effects of business planning on new venture performance. Journal of Management Studies, 47(3), 391-415.
Upton, N., Teal, E. J., & Felan, J. T. (2001). Strategic and business planning practices of fast growth family firms. Journal of Small Business Management, 39(1), 60-72.
Gruber, M. (2007). Uncovering the value of planning in new venture creation: A process and contingency perspective. Journal of Business Venturing, 22(6), 782-807. doi: 10.1016/j.jbusvent.2006.07.001
Chen, X.-P., Yao, X., & Kotha, S. (2009). Entrepreneur passion and preparedness in business plan presentations: A persuasion analysis of venture capitalists’ funding decisions. Academy of Management Journal, 52(1), 199-214.
Ding, E., & Hursey, T. (2010). Evaluation of the effectiveness of business planning using Palo Alto’s Business Plan Pro. Department of Economics. University of Oregon.
Delmar, F., & Shane, S. (2004). Legitimating first: Organizing activities and the survival of new ventures. Journal of Business Venturing, 19(3), 385-410. doi: 10.1016/s0883-9026(03)00037-5
Shane, S., & Delmar, F. (2004). Planning for the market: Business planning before marketing and the continuation of organizing efforts. Journal of Business Venturing, 19(6), 767-785. doi: 10.1016/j.jbusvent.2003.11.001
Hechavarria, D. M., Renko, M., & Matthews, C. H. (2011). The nascent entrepreneurship hub: Goals, entrepreneurial self-efficacy and start-up outcomes. Small Business Economics, 39(3), 685-701. doi: 10.1007/s11187-011-9355-2
Liao, J., & Gartner, W. B. (2006). The effects of pre-venture plan timing and perceived environmental uncertainty on the persistence of emerging firms. Small Business Economics, 27(1), 23-40. doi: 10.1007/s11187-006-0020-0