Strategic Planning in SMBs (Small & Medium Businesses)
by Muhammad Kamran
What is Strategic Planning
Strategic planning is the process of setting long term organizational goals, development of strategies, allocating resources to pursue these strategies. It may also extend to implementation of strategies to follow up on their progress and outcomes and making changes in either the strategies or their implementation or both due to changing outcomes or circumstances. The later part makes it more of an ongoing process rather than one-off exercise.
Strategic Planning in Large Businesses
In large businesses the ownership is often separate from the management. Normally the owners (shareholders and sometimes some other stakeholders such as financial institutions or regulators) appoint managers (board of directors) with responsibility to manage the business. Due to the size and complexity of the business, the impact of decision making on a larger organization, the dependence of board’s continuity and remuneration on company’s performance and the availability and affordability of resources, large businesses normally have a well-structured strategic planning process in place. Such businesses have well defined vision, mission and corporate objectives and strategies to achieve these objectives. Some of the large businesses even have a separate function headed by a Chief Strategy Officer to design and implement strategies to make sure that strategic planning and implementation is given its due priority and is not compromised due to the priority of managing the business. Some of the businesses use external strategic planning experts to develop strategic plan for the business. Whatever approach is adopted, most large businesses do engage in strategic planning and often have a strategic plan and measure their performance against the set objectives, efficiencies and outcomes as defined milestones in the plan.
Importance of Small and Medium Businesses (SMBs)
Small and medium businesses (SMBs) are the key drivers of employment and economic growth and make up the largest business sector in almost every economy. SMBs dominate many important sectors and form crucial forward and backward links in both value and supply chain of various large capital intensive industries. SMBs help avoiding dominance of few large players in industries and marketplaces by providing important competitive and structural balance. SMBs normally cater those niche or fragmented markets which are less attractive to large enterprises due to their risk-return considerations or are considered economically unviable for large businesses. Also, SMBs are big contributors in innovation by acting as “seedbed” for start-ups which may turn into a new industry or a large business in future.
State of Strategic Planning in SMBs
In spite of the importance and their many contributions to the economy, in most of the cases SMBs have higher failure rates and poor performance level. It has been observed that as opposed to large businesses, SMBs normally do not engage in strategic planning. While it is certainly true that performance and success of a business is not dependent on strategic planning alone but to survive in highly competitive and turbulent market conditions, it needs proper planning. Findings generally support that enterprises are at greater advantage to planning than not planning.
It has been observed that strategic planning is generally more common in better performing SMBs. As compared to those who do not engage, SMBs that engage in strategic planning achieve higher sales growth, higher return on assets, higher profit margin and higher employee growth. Moreover, such enterprises are also likely to be more innovative and most importantly less likely to be those who fail.
Therefore, though the extent, process and methodology of strategic planning in SMBs could be different from those in large businesses but the strategic planning is as important for SMBs as large enterprises.
Reasons of Lack of strategic planning in SMBs
Generally, SMBs are owner-managed businesses acting as extensions of their owners. Actions and decisions in these businesses revolve around the owner-managers and all the guidance and planning comes from them and is normally tied up with their personal preference and objectives. Therefore, the main onus of lack of strategic planning in SMBs is on its owner-managers. According to Mazzarol (2004) the owner-managers lack long term vision as to where their business is headed.
Generally, the owner-manager’s motivation for being in business determines the level and extent of strategic planning in SMBs. These motivations are influenced by multitude of psychological, sociological, demographic and environmental factors such as education, gender, ethnicity, social marginalization, family commitments, personal aspirations etc. Though it is not the case always but it has been observed that when the personal motivations and ambitions of owner-managers are profit or growth maximization then there will be higher level of understanding and inclination towards strategic planning. Whereas, when the personal motivation and ambitions are fulfilment of personal goals then there will be higher level of lack of strategic thinking.
Even when the owner-managers wish to grow, they are prevented from doing so by barriers. Irrespective of size of a SMB following main barriers prevent SMBs from strategic planning:
- Lack of time – The owner-managers are often involved in day-to-day operations of the business. Therefore, they do not have time to focus on any sort of long term planning.
- Lack of expertise – In most of the cases owner-managers lack expertise in many areas of the business. It has been observed that normally owner-managers setup their business around their primary skills (which makes sense when starting a business) and try to efficiently manage that aspect of the business. They do not focus in developing expertise in other areas of business.
- Inadequate knowledge of planning process – As most of the SMBs emerge from nothing and are built by the owner-managers from scratch, the owner-managers and the team they build around them generally lack adequate knowledge of planning process because in most of the cases at the initial stage they cannot afford to bring on board people having knowledge and experience of planning process.
- Reluctance to share strategic ideas with employees and others – In most of the cases owner-managers are reluctant to share business information with anyone and want to remain focal point of every decision making. They even do not want to share future direction of the business and their views in this regard with their teams.
- Size of business – The bigger the size of a SMB there are more chances of being inclined towards strategic planning.
- Type of industry – Most of the SMBs work in niche markets and industries which are less attractive to large enterprises. Therefore, the whole of the industry sometime lack planning process and hence the players in the industry find it irrelevant to adopt something which is not normally prevalent in the industry.
- Internal implementation barriers – Due to lack of prior experience and expertise owner-managers often fear/face internal implementation barrier even if they want to, or try to, introduce strategic planning.
- Business life-cycle/stage of development – Whether the owner-managers will be inclined towards strategic planning depends on the stage of business/product life cycle. It is very important to do proper planning at all stages especially at both initial and maturity stages when the risk of failure is the highest.
Challenges in Strategic Planning in SMEs
The challenges of introducing strategic planning in SMBs can be divided into following three categories:
- Convincing for the Strategic Planning – The first and foremost challenge is to convince management that the business needs proper planning specially when the business is performing well. As the business is managed, in most of the cases, by those who created it from nothing, they feel that they know everything about the business and hence the way it is managed is the best way – after all they think they are successful because of what they have been doing. It is therefore important to understand the motivations of the owner-managers and identify the main reasons (barriers) of lack of strategic planning in the business. If the owner-managers are not entrepreneurial they will not engage in active growth activities including strategic planning. If they are entrepreneurial, then identify areas of improvement and convince the owner-managers that the business needs proper planning as either it has reached or is reaching to a point where it cannot grow / sustain without proper and deliberate actions (strategic plan).
- Preparing Strategic Plan – Most of the SMBs operate in niche markets where there is no or minimum public information available about the industry and competition. Also the information available within the business is not that extensive due to lack of sophisticated data capturing and analysing capabilities. Therefore, scanning of both internal and external environments to analyse strategic position and options is not easy in such entities. The managers also lack knowledge about outside the organisation and hence they are often reluctant to accept anything contrary to their own knowledge and working style when it comes to both market and practices and therefore, they are resistant to accept both changes and challenges. Preparing a strategic plan in such environment is both difficult and challenging. Therefore, it is important to engage relevant teams within the business throughout the process of preparing the plan. This will give them sense of participation and they will be more inclined to own and implement the plan successfully.
- Implementing Strategic Plan – Perhaps the most difficult challenge in every business is to stick to and implement the strategic plan specially if the business operates in continuously changing environment. It is important to make sure that the plan is continuously updated to meet the changing circumstances. Though the main goals and strategies many remain same but the implementation plan can be broken down into short term plans with defined milestones to mark the journey towards overall success and give team sense of achievement.
SMBs play important role in economic development of a country and therefore strategic planning is as important for these businesses as for any large business. It is important to understand most relevant reason(s) of lack of planning in the business, identify areas of improvement and convince the owner-managers that the business needs proper planning as either it has reached or is reaching to a point where it cannot grow / sustain without proper and deliberate actions (strategic plan). It is equally important to engage relevant teams within the business throughout the process of preparing the plan. It is better to initially start with a short term and easy to implement plan with fewer and simpler strategies. This will help build confidence and experience of both owner-managers and their teams when these strategies are implemented and have positive impact of the business. Strategies which are bit complex and require longer time to implement and produce results can be included in next phase.
Mazzarol, T 2004, “Strategic Management of Small Firms”, “Explaining the lack of strategic planning in SMEs” – Edith Cowan University Publication 2007, “Implications of Strategic Planning in SMEs”- Sascha Kraus, B. Sebastian Reiche, & Carl Henning Reschke – Version September 2007.
The writer is a chartered accountants and member of CPA Australia, working as finance manager at Southern States Group, Australia.