This document provides a critical perspective on the history, theory, and impact of business planning in contemporary businesses and business schools. It discusses why planning is advocated for but theories to guide the planning process are lacking. While planning assumes the future is predictable, empirical evidence shows most new organizations do not produce formal written plans and planning outcomes do not necessarily lead to success. Factors like social capital and knowing customers beforehand are more strongly correlated with profitability than planning. The document suggests planning provides legitimacy and signals conformity to institutions that promote planning, but does not provide advantages in the actual process of starting a new organization. Alternatives to traditional planning education, like experiential learning models, are proposed.

1. 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. 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?

3. 3
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

4. 4
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

5. 5
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)

6. 6
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)

7. 7
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.

8. 8
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)

9. 9
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)

10. .
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.

11. 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.

12. 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”
2

13. 3
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.

14. 14
FIGURE 1
Institutional sources, institutional pressures, and
business planning behavior
Government
agencies
Industrial field Educational
system
NormativeMimeticCoercive
Human Capital
Social Capital
Demographic
Variables
Survival Profitability
Institutional
sources
Institutional
pressures
Performance
outcomes
Control
Variables
Writing a business planInstitutional
behavior
H1 H2 H3
H4

H5

15. 15
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

16. 16
.
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

17. 17
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).

18. 18
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.

19. 19
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

20. 20
Alternatives to planning and education
 Honig, (2004) A contingency model of business planning,
Academy of Management, Learning and Education

21. 21
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)

22. 22
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

23. 23
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

24. 24
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.

25. 25
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.

26. 26
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

27. 27
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),

28. 28
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

29. 29
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.

30. 30
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.

31. 31
Causal decision making
 Goal is established
 Alternative means identified
 Constraints on means
 Selection process between the different means takes place

32. 32
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

33. 33
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.

34. 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 ”.