It’s easy to see why strategy is important for big businesses but why is it important for business owners as well?
What is Strategy?
In the article:
I defined strategy as:
“How you achieve your own objectives by winning the hearts, minds and business of customers by out-thinking and outmanoeuvring competitors.”
This puts the emphasis on:
- your objectives
- winning and then delighting customers
- whilst having competitors trying to stop you.
Hidden from view but still important is the fact that you have to do this in a wider economic, political and social environment that may help or may inhibit what you want to achieve.
Boom times make it easier to achieve your objectives. Recessions force you and your customers to up their game or risk finding that they can no longer afford to play it.
Why Is Strategy Important To Big Businesses?
Before looking at why owner-managers need to take the time crafting a strategy, I think it’s worth looking at the benefits of strategy to big businesses.
After all many small and medium sized businesses have to compete against giants who have the advantages of huge financial resources and plenty of clever people.
The Advantages Of Strategy To Big Businesses
The business strategy of a company provides the big picture that shows how all the individual activities are coordinated to achieve a desired end result.
Big businesses have a big problem with coordination because of the number of people involved and how work is done in more and more specialised groups.
In a very small business, the business owner does the sales and marketing. As it gets bigger, a salesperson and a marketing assistant are hired. Then a sales and marketing manager or director is given more autonomy. When the business gets bigger or to help the business get bigger, more sales people are hired.
In a big company, the sales and marketing functions are split. Marketing is responsible for generating leads and creating products, the sales function has to convert the leads into customers. The responsibilities become blurred. Who is to blame if sales values and volumes are not up to standard.
As the business gets bigger, the marketing department is split into the different types of marketing. A marketing research manager is appointed. Each brand has a manager. The different marketing medias have their own managers. The business continues to grow and staff are added underneath the managers.
This process happens in every function and making sure that everyone pulls in the same direction becomes impossible with a clear strategy and direction. Even then it is hard.
It is through the strategy process that the overall direction of the business is set to produce the best results it can. This is based on the opportunities and threats in the outside world and the internal strengths and weaknesses of the business.
As the business grows and responsibilities split, key commercial and competitive information is spread throughout all the departments. A formal strategy process helps to pull all these jigsaw pieces together and to make sense of them.
A competitive action (like cutting prices to move slow moving stock) looks very different to the sales person who sees his customer suddenly buying from the competitors at prices levels he cannot match and the buyer who has been talking to the supplier of that stock who tells a story of how the competitor ordered ten container loads by mistake.
Preparing a strategic planning through a deliberate planning process is the only way a large, complicated business can prepare itself for future success.
Competitive advantages are hard to create. Without a clear direction and coordinated action, there is virtually no chance that a large business can continue to remain competitive. It’s easy to add costs but much harder to create products customers want to buy at prices they are willing to pay.
The reasons for large companies to prepare a detailed strategic plan through an elaborate planning process are compelling. Strategy is important because it is the only way they can hope to survive against better coordinated competitors moving in a clear, commercially viable direction.
Owner-Manager Businesses Are Different
Owner-managed businesses are very different from the giant companies with many levels of professional management.
One person has the final responsibility and is fully involved in the rewards. Public companies also have a powerful CEO but the rewards of business success are shared with the shareholders, many of which are faceless institutions with no loyalty for the business.
They don’t have such large coordination problems and it’s easier to communicate a clear direction.
But Not That Different
If we assume that owner-managed businesses stay within the UK definition for small and medium sized enterprises (SMEs), we can have a vast range of different owner / employee configurations in businesses of up to 250 employees. (Nor some owner-managed businesses are much bigger and have many subsidiaries. these are in effect privately owned giant companies with all of their problems.)
The business may have just one person – the owner.
There’s no coordination problem but direction is still an issue.
If the business owner doesn’t have clear, consistent goals then one action will push the business in one direction. Another action pushes the business in another direction.
Progress is slow, financial results disappointing and the business owner may feel the pressure to try even more new things.
The business may have one owner and a team of 150 employees managed through five functional directors. This gives plenty of scope for problems to arise between sales, marketing, operations, finance and HR.
Each wants to be seen as doing a good job to be the owner’s favourite and the second in charge but what’s sensible for each function is often sub-optimal for the business.
Operations wants long production runs to keep costs low. Sales want short lead times and extended credit to make the products easy to sell. Finance needs to keep stocks / inventory and debtors / accounts receivable down because funding is tight.
The business may have four partners who own equal shares and twenty other employees. Each partner has a different vision of what they want in ten years time. One wants to retire but stay as a non-executive director. Another wants to sell because he’s sick of the trade.
Even in a small business, there is need for a clear direction and coordinated action.
There is need for strategy. It is important for small businesses as well as big businesses.
When Can Smaller Businesses Afford To Ignore The Importance Of Strategy and Their Need For A Strategic Plan?
Before looking at the particular situations where it is really important for business owners to have a clear strategy, let’s look at when they can get away with taking the easy way out and avoid the effort of serious strategic thinking that leads to a strategic plan.
- There’s only one business owner and he or she doesn’t want to make changes; and
- The external environment is kind or at worst benign and is expected to stay that way; and
- The business has plenty of financial resources to call on if performance dips. This means it has the time to wait and see what happens before it has to take any actions; and
- Performance is currently good; and
- Customer needs are stable and expected to stay the same for the next 3 to 5 years; and
- Competition is well established and not likely to disturb the status quo. No new firms, possible from overseas with much lower costs, are likely to enter the market in the next 3 to 5 years.
Basically, strategic planning isn’t needed much if things are good and expected to stay good.
In these situations, strategy is not important.
The Strategy Paradox
I’ve just taken you through the situation where startegy and strategic planning isn’t important for owner-managed businesses.
The conditions are quite restrictive but they can happen in sleepy but profitable markets.
The strategy paradox is how do you know what’s going to happen to the external environment if you don’t do the following analyses?
>>> PEST Analysis
The links take you to my Differentiate Your Business blog.
How do you know that what customers want and need will stay stable for the foreseeable future if you don’t investigate customer value and carry out research on how it can change in the future?
How do you know that competitors will stay sleep if you don’t monitor what is happening with their performance and management changes?
It’s beginning to look as if you need to do some strategic planning to make sure you don’t have to do a lot of strategic planning.
Perhaps strategy is important after all, even for these owner-managed businesses if they want to sleep well at night and feel confident that what they have is protected.
Then there’s the kicker.
If you were an ambitious entrepreneur, can you think of a better opportunity than shaking up an existing sleepy but profitable market?
You could make a big bet that you could get in early in the next big thing and it could give you a terrific return.
But it’s risky. People who take big bets often lose their stake money.
The opportunity to stir up a sleepy, profitable market where the existing competitors are COMPLACENT looks a much better risk.
Even those competitors that have the ability and the resources to fight might not have the stomach for it.
Strategy is looking even more important.
It’s so much better to be prepared than to be sorry that you weren’t.
When Strategy is Not Just Important But Vital For Business Owners
I am a believer in strategy and setting clear goals and objectives.
I think it’s vital that you spend time thinking about the future of the business and pulling it together in a strategy if:
- There are multiple business owners or if the single business owner is ambitious and wants to shake up the market; or
- The external environment is tough at the moment or threatens to turn difficult in the future; or
- The business has few financial resources so that if performance dips it has little time before it has to face up to a cash crisis; or
- Performance is currently poor and needs to be improved; or
- Customer needs have changed but the business hasn’t or if customer needs are expected to change in the next 3 to 5 years; or
- Competition is new and/or aggressive. Or if there has been a change in ownership or management in one of the competitors that could signal a change in priorities and objectives.
In these situations – and notice that it is OR because each triggers a strong need for strategic thinking and planning – strategy is vital.
If It Is Important, What Stops A Business Having A Better, More Formal Strategy?
- There is no recognised need – performance is very strong. If business is good, the assumption is that the management team is very effective, knows what it is doing and future performance will remain high. The inevitable question is “Why change a winning formula?” although that has led many companies to grow complacent and to lose any competitive edge.
- There is no knowledge of how to put together a formal strategic plan or to hold effective strategy workshops. There is an element of mystery about strategic planning and a feeling that it has to be more complicated than it really is. If the management team don’t know where to begin, and they don’t know a good strategy consultant or coach, they may be very reluctant to approach somebody else.
- The management team has a closed mindset. Unfortunately managers can become blinkered because they have spent so long in this one industry that they believe that there is only the one way to compete. The logic is that if there is only one strategy that everybody uses, there is no value in reviewing or refining it. Instead it is much better to focus on operational improvements.
- There is no strategy advocate. If no one puts the idea forward, it won’t receive any attention.
- There may be a fear of change. A new strategy implies change and that can mean that people feel that they have as much to lose as they do to gain. On that basis, they may have little incentive to consider preparing a strategic plan.
What Strategy Do You Need?
I’m not a big fan of big, long, written strategic planning reports that are done once and never looked at.
You get tremendous value from the strategy process and stepping away from the day-to-day issues and looking at the long term future. Thinking about what may happen makes you much more aware of the symptoms of change to avoid the boiled frog problem where some dangerous happens so slowly that you don’t notice until it’s too late..
Your strategy should normally focus on competitive strategy and how you can win customer preference over competitors. This is a strategy based on establishing a differentiation advantage.
You want a short strategic plan that becomes a living document and guides the decisions and actions made by you and your team. As things change, it is updated and kept constantly relevant to what is happening in the business.
Strategy Is Important Because…
It is the source of long term profits.
You are in a fight with competitors over the profitable business of customers and the battleground is uncertain and constantly evolving.
Chinese general and military strategist Sun Tzu said
“It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle.”
Strategy is how you get to know your enemies, yourself and the terrain on which you will fight.
“Strategy is like an open folder on your desk. You should always be thinking about it… Entrepreneurs have to think of strategy as something dynamic and fluid: What is a good idea in 2012 may be a bad idea in 2014. They should be constantly reinterpreting the company’s experiences as they happen. So it’s not just, Does my company make a difference? It’s, Does my company make a difference today?” says Professor Cynthia Montgomery, author of The Strategist: Be the Leader Your Business Needs
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