Can a Lean Canvas Replace a Traditional Business Plan?
More than many other MBA students and graduates, entrepreneurs love possibilities. And only within roughly the past 15 years have new kinds of business plan possibilities captured the imagination of entrepreneurs. Some of these planning approaches—which embody radical departures from the process of drafting traditional business plans—appear to be gaining momentum.
What entrepreneur wouldn’t love to dispense with the lengthy and often tedious process of spending months drafting a traditional business plan—a document that Stanford entrepreneurship professor Steve Blank characterizes as one that “investors make you write that they don’t read.” Business plans customarily include five years worth of financial forecasts and 12 to 18 months worth of new product marketing plans. That’s a hefty volume of speculation entrepreneurs often need to estimate under extremely uncertain conditions that can render accuracy virtually impossible.
Moreover, what entrepreneur wouldn’t love to replace their typical 40-page-plus business plan with a single-page document—if for no other reason than investors could no longer dodge meeting requests through spurious excuses that they “haven’t yet found time to read” a document they expected in the first place?
A one-page document of this kind may not satisfy every potential investor at every financing stage. But many investors will consider a document like this to be more than adequate. Read on for an analysis of one viable alternative to traditional business plans.
How Lean Startups Encouraged Lean Business Plans
One newer business planning approach for startups aligns with the now-common “lean” startup principles that earlier in this decade gained popularity in Silicon Valley and form the topics of some recent business books we’ve showcased here on BSchools. Lean methodologies such as agile development grew out of struggles in the software industry to manage product creation cycles that had become unmanageable because they now had to operate continuously in response to changes prompted by aggressive competitive threats. In particular, the agile approach saves time and resources by building new products through iterative, incremental steps that produce only the most essential functionality.
This classic Harvard Business Review article by Blank, “Why the Lean Start-Up Changes Everything,” explains how concepts borrowed from lean methodologies influenced a rethinking of traditional business plans. For example, in contrast to generally accepted business plan development methods, the lean approach encourages entrepreneurs to only conduct minimal research. Instead, lean methods encourage entrepreneurs to talk directly with potential initial customers. That way, they gain a more accurate and complete understanding of the needs of such early adopters, as well as the opportunity to build relationships with likely first customers.
Lean methodology also encourages the faster development of minimum viable product prototypes, or MVPs, that don’t require substantial development time or budgets because they only offer the most critical features. If the MVP doesn’t win validation from customer reviewers, the lean approach applauds “pivoting.” Currently in vogue in Silicon Valley, that term denotes quick course corrections based on revised initial assumptions that better suit customer needs.
In other words, the approach rewards chasing customers and markets instead of funding. If entrepreneurs receive enough validation from their customer reviewer panel, the arguments in favor of funding start to seem so overwhelmingly compelling to investors that access to startup capital ceases to pose such a challenging obstacle. Accelerated launch schedules and rapid scaling then flow naturally as an outcome of this process.
The Lean Canvas Framework: Advantages Over a Traditional Business Plan
First conceptualized by business model expert and author Ash Maurya in 2010, the platform for this approach comprises a framework known as “lean canvas.” As Blank notes, this diagram depicts how a firm creates value. The canvas compares key characteristics of both the product and the market through an analysis of essential elements known as “building blocks.” Nine building blocks are used to describe every conceivable business model, whether the model belongs to Apple, Amazon, or Starbucks. The same nine components also allow for the design of any new business model imaginable.
Building Block Topics: Focused Essentials
The building blocks compare in some ways with the more general sections of a traditional business plan, such as the latter’s Opportunity, Execution, Company Overview, Executive Team, and Financial Forecasts sections.
However, that’s where the similarities end. For one thing, the topics of the building blocks comprise more focused and targeted essentials, which we interpret in these ways:
- The Problem – The marketplace obstacles or challenges that the new product, service, or venture plans to address.
- The Solution -The action mechanisms or methods through which the new product, service, or venture will solve the marketplace challenges.
- Key Metrics – These are performance indications that measure progress, such as market share against competitors, or an individual product’s contribution margin towards the overall profitability of a product line or division.
- Unique Selling or Value Proposition – The exclusive competitive advantages that the product, service, or venture offers and that entice customers to buy despite competing alternatives in the marketplace.
- Unfair Advantages – The overwhelming advantages the product, service or venture exerts in the marketplace that competitors cannot match or surpass in the short-run.
- Channels – For this building block, Maurya specifies a very different definition than those typically appearing in MBA marketing management textbooks. He defines channels simply as “paths to customers, whether inbound or outbound.” This is a broader interpretation than the means that exist through which the business can distribute the product or solution. These channels include intermediaries like distributors of physical goods in brick-and-mortar marketplaces. Channels also include search engine optimization (or SEO) and other techniques that enable customers to find sellers online.
- Customer Segments – These are specific categories of customers to which the business appeals, or “targets.”
- Cost Structure – The costs the business must pay in order to bring the product or service to market, like the costs of direct materials and labor in manufacturing processes, or for online businesses, computer server leasing within data centers.
- Revenue Streams – The earnings cash flows, expressed over time, from specific products or services.
Emphasizing “Big Picture” Relationships Among Building Blocks
Furthermore, unlike the narrative format of a business plan, the diagram displays all these elements side-by-side on a page, poster, or computer screen—that is, within a single visual framework. That way, the canvas offers a substantial advantage because it emphasizes the big-picture synergies and interrelationships among the building blocks in a way that a traditional business plan narrative cannot.
According to Swiss startup strategy expert Alexander Osterwalder, “the combination between great products and a great business model is going to keep you ahead [of] competition in the coming decade. So what you really want to understand is how all these pieces fit together and what the best business model could be for your idea.”
Adapting Business Models
Also unlike a business plan, the canvas allows one to experiment with and adapt existing business models for new purposes. For example, Osterwalder points out that the business model of Nestle’s Nespresso coffee system, which prominently features high-end retail “boutiques,” is nothing but a recycling of Apple’s Apple Store retail concept. Because both companies built their own stores to create high-end consumer brands, the stylized depictions of their business models on lean canvases both display similar diagrams. Visually representing the models in such ways enables model designers to more easily recognize the advantages and drawbacks of repurposing a venerable model to serve the innovative purposes of a new startup.
How the Lean Canvas Expedites Drafting and Revisions
When finalized, the one-page format is faster and simpler for entrepreneurs to write than a lengthy and complex business plan which could take months to draft and revise. And when printed, the canvas becomes a one-page document investors are much more likely to read. Moreover, instead of a PowerPoint slide deck, the canvas can also form the foundation for entrepreneurs’ succinct investor pitches.
Business Model Competitions
Because the lean methodology provides in many ways a superior means of presenting the business model narrative that appears within most typical business plans, increasing numbers of entrepreneurs and investors began to rally around the lean business model methodology. This movement led to the staging of business model competitions requiring contestants to apply the lean business model framework during their presentations before judging panels. Some events, like the International Business Model Competition, offer prize pools as large as $200,000.
But What About the Numbers? Extensions to the Lean Canvas Model
In January 2018, Maurya acknowledged a deficiency in the lean canvas framework. He conceded that the lean canvas framework alone could not replace more complete business plans for stakeholders who required financial forecasts and product introduction roadmaps.
Maurya’s team then introduced two diagrams that complement the lean business model framework. Similar in principle to the lean canvas, the first, which he named the “customer factory blueprint,” applies only seven key metrics “to replace all the numbers in a typical financial forecast spreadsheet.”
The customer factory blueprint specifies a “minimum success criteria,” or MSC. Other metrics include:
- Revenue (the pricing model)
- Retention (the drivers of repeat purchases)
- Acquisition (how the firm identifies new customers)
- Activation (the initial value experience)
- Referrals (the drivers that encourage customers to tell others about the product or firm)
- The annual growth rate
Maurya calls the second diagram the “traction roadmap,” or TR. The TR’s purpose is to illustrate a product roll-out’s objectives and milestones to stakeholders. Some milestones might assess the fit between the problem and the solution, or the fit between the product and the market; others might indicate when the firm’s objective shifts to rapid scaling after testing has assured the management team of the product’s marketplace success.
It might seem too early to tell whether these two complementary quantitative tools will win acceptance comparable to the lean canvas framework. However, one effect seems apparent. These two additional frameworks help remove some of the remaining roadblocks to the widespread adoption of the lean canvas methodology as a replacement for traditional business plans.