Planning to Fail Can Spell Success
By Steve Bareham | September 1, 1999
In the plethora of data released by Statistics Canada each year, two numbers loom that are of particular importance to small business people:
- about 145,000 new businesses start up each year in this country, and
- about 137,000 businesses declare bankruptcy each year.
It isn't hard to do the math; the ratio is almost one failure for each startup, and it begs the question: "How is it possible that entrepreneurship has so many casualties both in terms of money lost and lives often horribly upset?"
Some people respond to this question by suggesting that there are no guarantees in business; indeed the assumption by many is that risk and failure have always been integral parts of taking the plunge into self employment. Even the Webster's Dictionary definition of entrepreneurship appears to equate entrepreneurship with risk-taking:
"Entrepreneur: one who organizes, manages, and assumes the risks of a business or enterprise..."
But, is accepting risk really necessary (or wise) in business? To answer this question we can look at the causes of business failure and then assess the role that risk plays and how necessary, or unnecessary, risk is. In an extensive research undertaking, the prestigious Wharton School of Business quantified the causes of business failure as follows:
- 32% because of inadequate research and development
- 23% were bad ideas (re products and/of services offered)
- 14% due to uncontrolled costs
- 13% because of weak marketing strategies
- 10% erred with bad timing
- 8% succumbed to competitor activities
From my own experience as a business consultant, I would add another cause of failure to the list -- perhaps the most important cause of all:
- excessive optimism that blinds people to potential downsides and difficulties and that leads them to proclaim such statements as: "This is such a wonderful idea I don't need to waste my time with research or planning!"
Study the seven points carefully; it isn't difficult to see how good research and planning can minimize the damage disclosed in the Wharton study, or to see how adding a healthy dose of pessimism can counter the excitement of launching a new business that is often used to explain away problems and difficulties.
Knowing the common causes of failure is vital, but it is equally important that we know how to take steps to prevent them from happening to us; a planning to fail process can be extremely instructive.
Yes, that's right, you read correctly: planning to fail. Now, why, you probably ask, would anyone want to plan to fail?
Planning to fail turns the traditional planning process upside down, it mitigates the damage of over optimism, and it forces us to think and plan more laterally--outside of the linear boxes many of us spend most of our time in. By deliberately engaging in disaster scenarios and by then creating "predict and prevent plans" we lessen the chances of being blindsided by the landmines that are ever-present in the business world. Of course, not every disaster scenario we can envision will actually occur, but some of them undoubtedly will, and it is always better to be proactive and prepared with thought processes and plans in advance. Significantly, the very act of going through a process to systematically envision every conceivable problem is often enough to help us avoid them. Conversely, a state of rosy optimism leaves us totally unprepared.
When planning to fail, the goal is to think about every bad event and situation that can possibly befall your business. Following are five disaster scenarios that threaten many businesses; following each is a brief predict and prevent plan:
- Too few people will come to buy what I have to offer: All too often this is true, but you can find out if this disaster will happen or not by conducting research before you commit to unacceptable levels of risk. Your predict and prevent strategy could be to create a research plan designed to accurately determine customer response ratios, perceptions of need for your product or service, how much customers will pay and how often. This type of research does take some time and energy (often about two weeks to interview 200 objective potential customers) but it isn't really difficult to do and it certainly won't break you or cause a nervous breakdown as can a bankrupt business.
- Revenue will fall short of what I need and I'll fold within a year: to predict and prevent this disaster you need to know pretty precisely how much your revenue is likely to be (again, objective research will give you a very good indication) and then you need to work backward from gross revenue to plan your costs of doing business (too frequently the process is reversed--expenses are figured out and then rosy revenue projections are made to magically meet the outflow. Here, it always pays to under-estimate revenues by 25% and over-estimate expenditures by 25%; if the numbers reveal that you can still survive, you have a good chance of success.
- My competition is too well established and will kill my business: this is another distinct possibility that should not be underestimated. It is always a mistake to assume you can easily snatch customers from your competitors; you are far safer to differentiate your business (make it appreciably unique and better) to the point where you will attract new customers and perhaps slowly chip away at your competitors' customer bases. Never assume that because you are Business #4 in your field of endeavor that this means you will easily get 25 per cent of customers -- you might, but experience suggests it will take you several years of smart business operation to do this. In your research you should find out what people want from your line of business that they aren't getting now: cheaper, faster, better service, higher quality, new wrinkles, etc. -- then, create your business to respond accordingly.
- I don't have enough money: few of us do and often this can be a good thing because if we plan properly to run a business on a shoestring and grow it slowly while we learn and adapt, we often end up with more effective and efficient businesses while simultaneously reducing our risk of losing a lot of borrowed money. Predict revenue shortfalls and prevent disaster by paring back accordingly and by borrowing as little as possible at least until you have a good indication of long-term cash flows.
- Marketing to the masses is too expensive and this will break me: Many viable businesses have gone broke because news of their great idea wasn't transmitted to prospective customers in time; alternatively, so much was spent on marketing that sales couldn't keep pace with advertising and promotion costs -- both scenarios can spell disaster. Predict and prevent plan: test your promotional strategies with real prospective customers (not friends and relatives) to ensure that they are effective and that they respond to customer needs, not your perceptions of their needs. Then, scale your marketing efforts to limited geographic areas to get a real-world gauge of response and revenue flow--adjust accordingly--go bigger, go smaller, change the focus until the necessary buyer response ratios are assured. NOTE: segment and target finely and micro-market wherever possible because mass advertising is too expensive for most businesses--it's easy to commit to and to plan, but it rarely gets profitable response rates.
Most businesses should also create predict and prevent scenarios to minimize cataclysms such as these:
- it's a strange idea: maybe yes, maybe no, research will tell you
- technology will overtake me and keeping up is too expensive: plan for the worst; do the numbers still add up?
- society is changing and so will demand: research can tell you about probable impact
- we are heading into a recession: plan accordingly to reduce expenditures
- suppliers will raise prices or be late delivering: both of these things will likely happen: don't depend on too few suppliers and have contingency plans ready.
Initially, few people like to plan to fail because they find the process of deliberately envisioning disasters kind of depressing. After 25 years in business, though, I can testify that there is actually great strength to be found in conjuring up worst scenarios and then assuring yourself that you can not only cope but survive and thrive. I also know a little dose of imagined depression is far preferable to the real stuff if you fail to andequately anticipate problems and find yourself as one of those 137,000 bankruptcies.