November 22, 2004
COMMENTARY: Where are you going? | The small-business owner's guide to strategic planning — and why it matters
By Clint Strout
Senior management consultant, Berry, Fowles & Co., Falmouth
It is autumn in New England and the temperature is falling. For those of us who only dabble in winter sports, spring seems light years away. So to ease the winter doldrums, it's time to plan the winter vacation. How about southern California? The kids haven't been and it will help the U.S. economy.
So now we need to search for reasonable air fares, find some charming bed-and-breakfasts, reserve a rental car, decide on which historic, recreational and pop culture sites (Hollywood?) to exploit. Then we need to decide what to take for clothing, what meal plans we want, which relatives to alert, what the total budget will be, how we will get to and from the airport, who will take care of the dogs and the house, who will cover our professional duties, whether we will take travelers checks, do we want AAA maps, etc., etc., etc.
When we lay out the vacation planning process like this, it can sound like a lot of work. But we all know it is manageable and few of us complain that the process is too exhausting to repeat (spending 24/7 with two teenage daughters is another matter). As manageable as this effort is, most owners and executives of small businesses, (companies with revenues under $50 million) spend much more time planning a vacation than they do creating their company's strategic plan.
The case of the vanishing plan
As a student of organizational performance in large and small businesses alike, I never fail to be surprised by the look on an owner's face when, upon starting a consulting engagement, I ask to see a copy of their most recent strategic or business plan. The look is usually a sheepish stare, followed by, "We don't have one," or "We have one but I am not sure where it is." So I ask, "When was the last time you saw it?" And I usually hear something like, "The bank wanted to see it nine months ago," or "I noticed it last winter when I was looking for something else," or "I gave my copy to someone but I don't remember who."
These responses tell me that the planning process is not viewed as important and that even if there is a strategic plan, the client did not integrate it into daily business activities. Some clients tell me, "Strategic planning is for big business and we only have 10" ˆ or 50 or 100 ˆ "employees."
The first time I heard that, I created a list of the necessary elements of operating a big business. In addition to strategic planning, such elements include production control and efficiency, sound personnel management techniques, quality measurement and control, effective management reporting, well designed compensation and incentive plans, good customer service, sound marketing and advertising processes, sound management principles, an effective administrative support function, appropriate costing and cost tracking procedures, and so on.
Then I asked myself, which of these business practices apply only to big and not small business? The answer is none; there are not two sets of business rules, one for big and one for small business. Business is business, whether you work out of your house or have locations around the world. Strategy planning is as important as collecting your receivables and opening your business on time every day.
In fact, one of the four largest international accounting firms surveyed Fortune 500 CEOs and asked, "Five years from now, what will you look back on as your most important decisions for success?" The number one response was getting and retaining talent. But the second most important decision was executing a business plan well (followed by improved customer service, forming alliances and partnerships with other businesses and empowering employees through shared vision).
Taking a SWOT
Strategic planning is a five-step process that focuses on two areas: where you want to go in the marketplace and what operational improvements you want to implement.
The first step is to answer the question: Where are you now? This step involves several processes, including SWOT analysis (examining your company's strengths, weaknesses, opportunities and threats) and a market segmentation analysis.
The first two elements of the SWOT analysis reflect the company's internal world, and the last two are external. How can this process help shape your plan? Take a look at the following examples.
When reviewing its strengths, one of the major airlines identified its maintenance program as being highly efficient and cost effective. As a result, its executives decided to use those skills as a competitive advantage and in-source those services for other airlines, which created a highly profitable center in an industry known for perpetual losses.
Identifying your weaknesses obviously points to areas where improvement is needed. The high impact items (on profit or growth) certainly need to become priorities. When I asked one owner recently what his customers thought of his service, he said, "I'm afraid to ask." That's a pretty scary response. His customers can be anywhere on the satisfaction scale from "I am dumping this company as soon as I can find any reasonable replacement," to "The service I get is so great I can't believe I am not paying more for it." You need to see your business through your customers' eyes.
Looking outside
External opportunities may include alliances with other companies, such as McDonald's fast food outlets in Wal-Mart stores, or buying groups in which contractors or retailers get volume purchase discounts. Competitive analysis (comparing your company to competitors in the areas of price, delivery times, selection, service quality, innovation, etc.) helps us identify opportunities. This process may point out product niches that are not being serviced or distribution methods that are not being utilized.
External threats can emerge from regulation, competition, the economy, tax law changes and resource availability, among other factors. For example, the economic expansion in China has had a significant effect on the price and availability of some building materials. Also, regulations that tighten the enforcement of truckers' driving laws can reduce the number of miles driven in a 24-hour period and thereby increase costs per mile as well as slow delivery times.
The power of the matrix
Market segmentation analysis is a structured way of looking at your products or services in relation to market opportunities. It helps to weigh market characteristics in relation to the products and resources your company possesses. The power of the matrix is evident here. One of many exercises in segmentation analysis involves developing a worksheet, or matrix, with potential services, products or markets in columns across the top. The rows contain criteria that are important to consider in deciding whether to enter a specific market. Such entries may include the cost of marketing, the size of the market and capital expenditure requirements. Each product, service or market is graded, and the ones with high scores go to market.
For example, I worked with a midwestern engineering firm that decided to get into the industrial flooring construction business. By the time I arrived they already had hired a division manager and were fully funded. The manager also had identified the industries and market segments to focus on.
I convinced the client to do the segmentation analysis for a more objective assessment. We listed the potential industries and market segments at the top of the columns (chemical plants, utilities, retail/malls, manufacturing, hospitals, etc.), and in the rows we listed the key criteria to be considered in deciding which industries provided the best opportunities (including profitability, growth potential, competitive advantage, market size, low capital investment and synergy with existing services). This analysis identified the chemical plants and utilities as the best opportunities. The retail/malls and hospitals, which the client originally had identified as having the most potential, turned out to be much less attractive. They were going fishing in the wrong pond.
How's your vision?
The second step in the strategic planning process is to ask yourself what you want your company to look like in the future (three to five years out), including sales volume, product or service mix, geographic locations, distribution methods, manufacture vs. purchase and other factors. It is vital to set objectives or goals that will help you achieve your company's vision. The vision is captured in the company's direction statements (mission, vision and values). Your vision may include being the lowest cost producer of a product, doubling your sales or expanding by acquiring similar businesses in other regions.
Getting where you're going
The third step is to decide how you are going to achieve the newly identified goals and objectives. This part of the process requires that you identify strategies and programs that will achieve the desired results. For example, the strategy to reduce product costs may include instituting Japanese cost-reduction techniques. Doubling your sales volume may include additional inside and outside training for salespeople, adding sales and marketing tools, and more aggressive pricing policies. Acquiring similar businesses in other geographic areas will involve setting acquisition criteria, performing the due diligence process so you know exactly what you're are buying and lining up the necessary capital.
The nitty gritty
The fourth step is where the rubber hits the road. The tasks to carry out the strategies and programs are identified, resources are committed, benchmarks and deadlines are set and individuals are assigned to each task. This is your action plan. In the example above, the doubling sales strategy of increasing inside and outside training will include action steps such as setting up a training budget, determining the ideal skill set per employee (which will dictate training needs), identifying inside expertise for training, developing a training program, researching outside training resources and deciding on mandatory training hours per employees.
The fifth and final step is to review how you are doing. Accountability reporting kicks in, corrective action takes place and the original objectives are tweaked based on new information or market conditions. The focus becomes implementation and sustainability, and it is where most plans fail. (This is a subject for another day.)
The final word
The strategic planning process is a powerful tool to help businesses of all sizes reach their financial goals. Without such a process, the owner is often reactive and manages in an ad hoc manner. (Were you pushed or did you jump?) Market opportunities are lost and profitability and growth suffer. It's something to think about when you're planning your next vacation.
It is autumn in New England and the temperature is falling. For those of us who only dabble in winter sports, spring seems light years away. So to ease the winter doldrums, it's time to plan the winter vacation. How about southern California? The kids haven't been and it will help the U.S. economy.
So now we need to search for reasonable air fares, find some charming bed-and-breakfasts, reserve a rental car, decide on which historic, recreational and pop culture sites (Hollywood?) to exploit. Then we need to decide what to take for clothing, what meal plans we want, which relatives to alert, what the total budget will be, how we will get to and from the airport, who will take care of the dogs and the house, who will cover our professional duties, whether we will take travelers checks, do we want AAA maps, etc., etc., etc.
When we lay out the vacation planning process like this, it can sound like a lot of work. But we all know it is manageable and few of us complain that the process is too exhausting to repeat (spending 24/7 with two teenage daughters is another matter). As manageable as this effort is, most owners and executives of small businesses, (companies with revenues under $50 million) spend much more time planning a vacation than they do creating their company's strategic plan.
The case of the vanishing plan
As a student of organizational performance in large and small businesses alike, I never fail to be surprised by the look on an owner's face when, upon starting a consulting engagement, I ask to see a copy of their most recent strategic or business plan. The look is usually a sheepish stare, followed by, "We don't have one," or "We have one but I am not sure where it is." So I ask, "When was the last time you saw it?" And I usually hear something like, "The bank wanted to see it nine months ago," or "I noticed it last winter when I was looking for something else," or "I gave my copy to someone but I don't remember who."
These responses tell me that the planning process is not viewed as important and that even if there is a strategic plan, the client did not integrate it into daily business activities. Some clients tell me, "Strategic planning is for big business and we only have 10" ˆ or 50 or 100 ˆ "employees."
The first time I heard that, I created a list of the necessary elements of operating a big business. In addition to strategic planning, such elements include production control and efficiency, sound personnel management techniques, quality measurement and control, effective management reporting, well designed compensation and incentive plans, good customer service, sound marketing and advertising processes, sound management principles, an effective administrative support function, appropriate costing and cost tracking procedures, and so on.
Then I asked myself, which of these business practices apply only to big and not small business? The answer is none; there are not two sets of business rules, one for big and one for small business. Business is business, whether you work out of your house or have locations around the world. Strategy planning is as important as collecting your receivables and opening your business on time every day.
In fact, one of the four largest international accounting firms surveyed Fortune 500 CEOs and asked, "Five years from now, what will you look back on as your most important decisions for success?" The number one response was getting and retaining talent. But the second most important decision was executing a business plan well (followed by improved customer service, forming alliances and partnerships with other businesses and empowering employees through shared vision).
Taking a SWOT
Strategic planning is a five-step process that focuses on two areas: where you want to go in the marketplace and what operational improvements you want to implement.
The first step is to answer the question: Where are you now? This step involves several processes, including SWOT analysis (examining your company's strengths, weaknesses, opportunities and threats) and a market segmentation analysis.
The first two elements of the SWOT analysis reflect the company's internal world, and the last two are external. How can this process help shape your plan? Take a look at the following examples.
When reviewing its strengths, one of the major airlines identified its maintenance program as being highly efficient and cost effective. As a result, its executives decided to use those skills as a competitive advantage and in-source those services for other airlines, which created a highly profitable center in an industry known for perpetual losses.
Identifying your weaknesses obviously points to areas where improvement is needed. The high impact items (on profit or growth) certainly need to become priorities. When I asked one owner recently what his customers thought of his service, he said, "I'm afraid to ask." That's a pretty scary response. His customers can be anywhere on the satisfaction scale from "I am dumping this company as soon as I can find any reasonable replacement," to "The service I get is so great I can't believe I am not paying more for it." You need to see your business through your customers' eyes.
Looking outside
External opportunities may include alliances with other companies, such as McDonald's fast food outlets in Wal-Mart stores, or buying groups in which contractors or retailers get volume purchase discounts. Competitive analysis (comparing your company to competitors in the areas of price, delivery times, selection, service quality, innovation, etc.) helps us identify opportunities. This process may point out product niches that are not being serviced or distribution methods that are not being utilized.
External threats can emerge from regulation, competition, the economy, tax law changes and resource availability, among other factors. For example, the economic expansion in China has had a significant effect on the price and availability of some building materials. Also, regulations that tighten the enforcement of truckers' driving laws can reduce the number of miles driven in a 24-hour period and thereby increase costs per mile as well as slow delivery times.
The power of the matrix
Market segmentation analysis is a structured way of looking at your products or services in relation to market opportunities. It helps to weigh market characteristics in relation to the products and resources your company possesses. The power of the matrix is evident here. One of many exercises in segmentation analysis involves developing a worksheet, or matrix, with potential services, products or markets in columns across the top. The rows contain criteria that are important to consider in deciding whether to enter a specific market. Such entries may include the cost of marketing, the size of the market and capital expenditure requirements. Each product, service or market is graded, and the ones with high scores go to market.
For example, I worked with a midwestern engineering firm that decided to get into the industrial flooring construction business. By the time I arrived they already had hired a division manager and were fully funded. The manager also had identified the industries and market segments to focus on.
I convinced the client to do the segmentation analysis for a more objective assessment. We listed the potential industries and market segments at the top of the columns (chemical plants, utilities, retail/malls, manufacturing, hospitals, etc.), and in the rows we listed the key criteria to be considered in deciding which industries provided the best opportunities (including profitability, growth potential, competitive advantage, market size, low capital investment and synergy with existing services). This analysis identified the chemical plants and utilities as the best opportunities. The retail/malls and hospitals, which the client originally had identified as having the most potential, turned out to be much less attractive. They were going fishing in the wrong pond.
How's your vision?
The second step in the strategic planning process is to ask yourself what you want your company to look like in the future (three to five years out), including sales volume, product or service mix, geographic locations, distribution methods, manufacture vs. purchase and other factors. It is vital to set objectives or goals that will help you achieve your company's vision. The vision is captured in the company's direction statements (mission, vision and values). Your vision may include being the lowest cost producer of a product, doubling your sales or expanding by acquiring similar businesses in other regions.
Getting where you're going
The third step is to decide how you are going to achieve the newly identified goals and objectives. This part of the process requires that you identify strategies and programs that will achieve the desired results. For example, the strategy to reduce product costs may include instituting Japanese cost-reduction techniques. Doubling your sales volume may include additional inside and outside training for salespeople, adding sales and marketing tools, and more aggressive pricing policies. Acquiring similar businesses in other geographic areas will involve setting acquisition criteria, performing the due diligence process so you know exactly what you're are buying and lining up the necessary capital.
The nitty gritty
The fourth step is where the rubber hits the road. The tasks to carry out the strategies and programs are identified, resources are committed, benchmarks and deadlines are set and individuals are assigned to each task. This is your action plan. In the example above, the doubling sales strategy of increasing inside and outside training will include action steps such as setting up a training budget, determining the ideal skill set per employee (which will dictate training needs), identifying inside expertise for training, developing a training program, researching outside training resources and deciding on mandatory training hours per employees.
The fifth and final step is to review how you are doing. Accountability reporting kicks in, corrective action takes place and the original objectives are tweaked based on new information or market conditions. The focus becomes implementation and sustainability, and it is where most plans fail. (This is a subject for another day.)
The final word
The strategic planning process is a powerful tool to help businesses of all sizes reach their financial goals. Without such a process, the owner is often reactive and manages in an ad hoc manner. (Were you pushed or did you jump?) Market opportunities are lost and profitability and growth suffer. It's something to think about when you're planning your next vacation.
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