Understanding the different approaches to building a business can is necessary to start your business on the right foot. This can allow you as an aspiring entrepreneur to move fast, validate your ideas and reduce your risk of failure.
We are going to focus on the two most widely used approaches.
- Business Plan: this is the traditional approach of building a business. In Africa, if you learn about business in school, or even from a friend, most likely you learned the business plan approach. It is centered on using a document template called a business plan, that relies on past or existing data to make predictions about how successful your business is going to be. These predictions are called forecasts. The business plan can be elaborate and detailed. You will use it to convince others of your vision and to seek funding. It can take months to complete if you are new to it and may cost money. The business plan has been used for several decades which means there are countless resources. Whether it’s online, from a book or a professor, these resources are largely uniform. Some common sections you’ll find in the business plan are: Product and services, organization and management team, market analysis and financial plan and projections.
- Lean Startup Methodology: the lean business approach is an umbrella term that describes several approaches to building a business that share some common themes. The central idea is to create more value for customers with fewer resources. With lean, an entrepreneur is not attached to an idea. Rather they seek to find problems that customers need solved urgently and are willing to pay for a solution. That is why it focuses on leading with learning and listening to customers instead of creating a solution and trying to convince them they need it. Some of the central ideas are:
- Using scientific experiments for business testing
- Never ending customer learning
- Learn, build, measure cycle
- An iterative approach to solving problems
- Maintaining flexibility
Which method should you use when you’re starting a company? It depends.
The business plan approach is optimal if you’re creating a business which has a model that has been used, tested and proven thousands of times. For example, if you want to open a hotel, you have millions of examples. The business model is clear: guests pay you to rent rooms in your hotel. You may have event spaces you can rent out for celebrations as another source of revenue. This model is used by all the hotels in the world.
The lean canvas is best suited when you are introducing something new that doesn’t exist or can change an existing market. For example, you see that hotels in your area have a minimum of 10% of their rooms empty at all times. You believe if they lower their prices for these rooms and advertise them in real time, they can get bookings to reach 100% capacity. You believe you can create a platform that brings together hotels looking to fill rooms with flexible pricing and guests looking for a good bargain.
As an entrepreneur choosing the wrong approach can mean spending valuable time asking the wrong questions, or not asking questions at all. This can lead you to lose money, time and energy; Or worse, concluding that your idea isn’t worth pursuing based on the wrong feedback. It can also leave you unable to defend or prove the value of your solution.
This initial mistake can be costly. That is why LeanStart Africa focuses on making sure entrepreneurs have an understanding of the foundations and avoid these mistakes.