The first step in the strategic planning process is an assessment of the market. Businesses depend on consumers for their existence. If you are facing a rapidly growing consumer base, you probably will plan differently than if your clientele is stable or shrinking. If you are lucky enough to be in a business where brand loyalty still prevails, you may take risks that others cannot afford to take. Before you begin to assess the market, it is important that you complete a careful assessment of your own business and its goals.
The outcome of this self-assessment process is known as the mission statement. According to Glueck and Jauch, "The mission can be seen as a link between performing some social function and the more specific targets or objectives of the organization." Another definition states that the mission statement is a "term that refers to identifying an organization's current and future business. It is viewed as the primary objective of the organization".
Because these authors are writing for an audience of managers or would-be managers of larger businesses, their definitions may sound a bit lofty. If, however, you go back to the earlier example of a successful small business, you can see it started with a clear direction--what was to be achieved and, in a broad sense, how best to achieve it. While your own goal may be to survive, make a profit, be your own boss or even be rich, your business must first perform a social function, i.e., I must serve someone. Given this you must determine (1) the ultimate purpose and (2) the specific targets or objectives of your business.
The investors of Franchise A discussed above clearly had determined they wanted a business with the potential for international sales. With this objective they were able to determine the kind of franchise they wanted and the terms. They knew that some goods and services were more likely to be marketable overseas than others. Early research helped them determine which areas of the world would be the best places to start. This, in turn, helped them to further narrow their list of potential products. Also, they were able to assess the financial demands of various approaches to overseas markets. Their financial analysis enabled them to affirm that a franchise would be one of the alternatives with a high profit potential. All of these directions were derived from an initially vague desire to "go international." And, as the investors developed their ideas into a clearly defined business purpose, many issues were discovered that were critical to success.
Defining Your Business
A primary concern in defining a mission statement is addressing the question "What business are you in?" Answering this may seem fairly easy: however, it can be a complex task. Determining the nature of your business should not be strictly tied to the specific product or service you currently produce. Rather, it must be tied to the result of your output--your social function--and the competencies you have developed in producing that output.
Management theorist Peter Drucker suggests that if the railroad companies of the early 1900s or the wagonmakers of the 1800s had defined their business purpose as that of developing a firm position in the transportation business, rather than limiting themselves strictly to the rail or wagon business, they might still enjoy the market positions they once did. The obvious concern here is to ensure that you do not define your business too narrowly, leaving yourself open to economic changes or competitive challenges that make you vulnerable. The primary reason the service company mentioned earlier (Franchise B) failed was that it lacked a consumer base. These consumers were already being served by the current market. In another example, an entrepreneur developed a device to provide greater security for homes and vehicles. But, by focusing on the product rather than the service it was meant to provide, he failed to consider other services that already provided essentially the same level of protection at lower costs.
Your Firm's Philosophy
Once you have defined your mission statement, the next step is to define the firm's basic philosophy. Such a statement will help explain to your employees and associates how you would like to see the firm operate. Are you a risk taker, or would you prefer to build your business slowly from a solid base? How will you relate to customers, suppliers and competitors? What type of community involvement do you plan for your business, e.g., participation in recycling and volunteer activities? These questions, and many more, need clear answers to help your employees make operational decisions and conduct themselves in a manner consistent with your wishes. Much has been written about this concept in business literature under the term corporate culture. A clear explanation of your business's philosophy in the mission statement will provide a basis for the development of a consistent business culture.
Your Firm's Goals
The next step is to set clear goals to guide and maintain the business on a path consistent with its mission. Daniel Robey provides an excellent list of the key functions of business goals. To summarize his comments, goals serve to:
Justify or legitimize the organization's activities.
At one time, it was widely assumed that the owner of a company set that firm's goals. Glueck and Jauch refer to this as a "trickledown" theory because it was assumed that others in the organization simply accepted these goals. Chester Barnard, believing that it was naive to assume such ready acceptance, suggested that organizational objectives arose from a consensus of the employees. This "trickle-up" theory, however, is also naive in assuming that an organization is simply the sum of individual perspectives, and that it can achieve direction from an unguided and usually disparate group of people. Modern theories spring from combinations of these two approaches, suggesting goal development is a complex goal-bargaining process that enjoys some advantages of both basic theories.
Bargaining, while seeming a rather negative and poorly developed goal-setting approach, has the advantage of involving most, if not all, employees in the process. As a result, it is more likely that key concerns, internal as well as external, will be taken into account. By involving employees, you improve their understanding of and commitment to the firm.
Pierce and Robinson captured the complexity of goal setting in this statement: Strategic choice is the simultaneous selection of long-range objectives and grand strategy.... When strategic planners study their opportunities, they try to determine which are most likely to result in achieving various long-range objectives. Almost simultaneously, they try to forecast whether an available grand strategy can take advantage of preferred opportunities so that the tentative objectives can be met. In essence then, three distinct but highly interdependent choices are being made at one time. Usually several triads or sets of possible decisions are considered.
To improve the structure of this strategic approach, most experts suggest that a repetitive method be used in developing goals. This begins with the owner and perhaps a few key employees agreeing on a long-term direction for the business and suggesting major goals in line with this direction. Then, other employees are asked to suggest specific objectives, which are then reviewed before being implemented. Goals become the shared purposes of the owner and employees and thus, it is much easier to get the support of employees and their clear understanding of what needs to be accomplished.
Goals are defined as broad, ideal conditions. A possible goal could be "To become the leading small-package delivery service in the Kansas City metropolitan area." In defining goals it is important to understand (1) how the goal was derived and (2) how it provides guidance.
Objectives to Achieve Goals
Accomplishing a goal requires establishing and achieving several specific objectives, which must
Be clear, concise and attainable.
An objective to the above-stated goal could require that the dispatcher develop a route structure capable of providing three-hour service to any area within 20 miles of the city's center, with the service beginning within six months.
An objective has to fit within a hierarchical network of other objectives that together contribute to the firm's ultimate goals and mission. For example, a subsidiary objective to the one mentioned above may be "To purchase three new or late-model used delivery vans within five months." Another objective could specify expanding staff to drive the additional vehicles and to handle the expected increase in dispatching chores. This system of setting priorities is called a hierarchy of objectives.
Anthony Raia provides a list of guidelines to help you avoid pitfalls in setting objectives. Some of the most important include:
Adapt your objectives directly to organizational goals and strategic plans. Do not assume that they support higher level management objectives.
The formulation of a mission, goals and objectives is a complex, repetitive and continual process. As a small business owner-manager, your first reaction may be that you don't have the time or the resources to accomplish this. This may be true; however, you must develop a process that you can implement and be comfortable with. You will need to be aware of this process, the relationship of goals to ultimate performance and the need to be specific and consistent. A carefully throughout set of goals provides the base on which the rest of strategic planning will proceed. The time you put into carefully assessing what you hope to achieve and how you will measure it will reduce the time required to assess and control performance.
Environmental and Industry Analysis
In determining appropriate goals, you will need to consider the position of your business within its industry and the broader business environment. Several trends may affect your business prospects. Examples may include shifts in population (e.g., the purchasing status of "baby boomers"), trends in the economy, technological developments, legislation (e.g., safety or antipollution regulation) and the activities of special interest groups. As you clarify your mission and goals, you will find that some factors are important while others may not require your attention.
There are several approaches to dealing with fluctuation and change in your business environment. James Thompson presents a list of general strategies that provides a good "first cut" at the complicated process of making strategic choices related to the business environment. He argues that most organizations search for certainty in an uncertain, fluctuating environment. Depending on the business' resources and the specific situation, a business may adopt one of four approaches to the business environment.
Buffering can be used when you have an abundance of resources, sometimes referred to as organizational slack. However, this is a luxury few efficiently run businesses enjoy. If, for example, you possess a technological edge, you may be able to relax your vigilance in the confidence that you have the resources to adapt to changes that may occur. You are then able to concentrate on other environmental factors that may affect areas of your business in which you don't have such an advantage.
Smoothing is a useful approach when you enjoy surplus resources in one area but your ability to meet demand is overtaxed in others. A good example is a chimney cleaning service that was unable to meet demands for chimney repair and service during the winter months, but had to lay off employees during the spring and summer months. In an attempt to change the environment, the owner developed advertising and pricing strategies aimed at attracting more business during slow times. In addition the owner assessed the skills of his employees. He found that by doing general masonry jobs in slow times, he could retain workers while actually increasing the size of his business. This example also provides a clear illustration of how a small business can manage, and even change, its environment.
Forecasting is something, that all businesses must do. When you don't have the resources to use a buffering strategy or when conditions make smoothing impossible, you must anticipate environmental changes. The immediate need of most businesses is to monitor the competition. Other events that you can anticipate with an effective forecasting system include:
Effective forecasting is possible only when probabilities can be predicted; for example, you have a pretty good idea of what the odds are that shortages will occur in a raw material, or what the chances are that a law will pass providing new sources of assistance to small businesses. Unfortunately, many trends and changes are very difficult, if not impossible, to anticipate, even with the best forecasting system.
As a result you may find that you must resort to Thompson's fourth approach - rationing. An unanticipated technological breakthrough or a sudden change in the spending habits of your customers may force you to reallocate resources. In this situation, goals may need to be delayed or foregone altogether, and parts of your business may need to be reduced. All needs of the business will not be completely met, but you will move to a base from which you will have the best chance to recover. With time you will rebuild to compensate for any losses incurred.
The most important consideration in developing an effective approach to forecasting and planning is the development of your information system. In the world of personal computers, you may equate information systems with microchips and programming, but the concept as used here is much broader, referring to the way you gather, screen, analyze and use information that may affect your business. This guide is part of your information system. You are using it to inform yourself of modern approaches to managing, improving and possibly enlarging your business.
Too many businesses still have information systems that might be described as "shoebox" systems. Information about the business and its environment are collected in various documents that are stored in shoeboxes, or it is picked up through contacts between the owner and customers. The owner "analyzes" this information and the results are used to make further decisions.
The problems with this system are obvious. First, no effort has been made to determine what critical elements--internal or external to the business-should be assessed. Second, assessment is based entirely on what strikes the owner as memorable or important. Unfortunately, what is remembered is not necessarily what is important. Memory is influenced by preconceptions and perceptions, and by how busy, tired or distracted the owner was at the time an event occurred. An additional problem with this informal approach is that, should the owner want to verify his or her impressions of some series of events, it would be time consuming--if not impossible--to locate the records that would allow a full analysis. While "seat-of-the-pants" decision making based on this type of information system sometimes works remarkably well, much is left to chance.
Setting up an effective information system is integrally related to your mission and goals and to the specific environmental factors defined in your strategic purpose. Collect enough information, but don't collect too much-- this leads to information overload, where decision makers are so swamped they become incapable of making sense of the information, or of using it to make good decisions.
Developing a good system is a dynamic process. It is easy to determine what information you need to collect and how to obtain it. However, as the environment and your situation change, the information you need also changes. Items that were once important now are not. Other considerations, impossible to anticipate at the time you developed your system, have become critical.
Employees should be involved in determining what information is needed and where to obtain it. They are often the first line for data collection. They can provide insights and perspectives that you may not have considered. Together, you will be able to develop a reasonably thorough list of concerns that the information system should address.
In any information system, a variety of sources should always be used. You already collect much information in the documents you use to conduct everyday business. Other sources may include periodicals (particularly those published specifically for your industry), newspapers (or clipping services), books and experts in areas of concern.
Once you have collected the data, you will need to condense and analyze it. This is the information reporting system. You already produce reports for various government agencies and banks, which are nothing more than a presentation of the data you collect in a way that is useful to the particular agency. A good information system will provide information to employees in your business in a form that they need to make effective decisions and carry out their jobs. It will provide enough information, but not more than is necessary and useful. As the type of data collected changes over time, so will the reports needed. As a result, report requirements must be periodically reassessed so time is not spent producing useless reports.
Finally, information should be stored for easy retrieval to accommodate new situations that may require different analyses. In data processing, this system of storage is referred to as the company's data base. Whether you rely on an electronic or a manual system, storing information so it is easily retrievable requires considerable forethought. Much of the business software available today focuses on storing data in ways that allow it to be retrieved in many different forms and later combined for analyses that were not originally anticipated or necessary.
Internal Business Analysis
Once you've begun to collect the necessary information about your external environment, you will be able to consider how to best fit your business into the situations that surface. To do this you must clearly understand the strengths and weaknesses of your firm. For a long time, people assumed that small businesses were always at a disadvantage because they were small. Today, there are few commercial areas that don't have room for smaller competitors if they are focused and efficient.
The primary task in the business analysis phase is to identify those factors that may give you a competitive advantage. If you hold a patent or an exclusive license on a particular product or service, you may enjoy a competitive advantage. Flexibility is a major advantage that small businesses often enjoy over larger rivals. You may be able to respond more quickly and with less cost to mood swings or taste changes in the market. Also, small businesses can often move into new product or service lines more quickly than larger firms.
The nature of the technology used to make your product may often yield competitive advantages. If you employ individuals skilled in areas unique to your business, their skills will often yield cost advantages that may offset disadvantages in other areas. For example, your competitor may be further ahead in using computer-aided scheduling, but you are able to rely on specialists in your own firm and can market your product as a unique value while you move to minimize the technological differential. Once you are clear about the areas in which you are ahead, assess your weaknesses. Having done this, you can develop a strategy that has the best chance of succeeding.
Instead of simply trying to compete for customers on a single dimension, such as price, or to catch up in one area of technology, you are now able to consider alternatives derived from a combination of factors. You may, for example, see that a traditional competitor has an apparently insurmountable cost advantage from adopting a technology that yielded unforeseen benefits. An effort to compete strictly on the basis of price while attempting to catch up technologically is probably doomed to failure. On the other hand, a move into other product lines that take advantage of the skills used by your firm may give you a better chance for survival. Eventually, this strategy may give you the time needed to acquire the technology to compete in your original product area.
Finalizing a Plan
When you have a clear grasp of the competitors, customers, suppliers and situations you face, and you combine this with a realistic understanding of your own strengths and weaknesses, you can develop a strategic plan with a strong chance of success. You may decide that you have the strengths to compete with other businesses "head-to-head" in their best markets. You may choose to target a market that has not been touched by your competitors. You may see opportunities to influence local or state legislation in a way favorable to your needs. Or you may realize that you are constrained by a combination of circumstances that severely restrict your opportunities and leave you only limited chances for success. You should, however, under any of these scenarios, be able to make better choices.
Before you develop a detailed plan to implement, attempt to identify several possible alternative approaches. Frequently, when an individual or organization faces a problem or opportunity, solutions will appear to "pop up." You've faced similar situations before, you have a "gut feeling" that the way to solve the problem is to.... "
While your first idea may, in fact, work, the odds are it won't be as effective as other possibilities. The reason that this obvious choice may not be the best option is that it is usually based on experiences that, while appearing similar, are actually very different. You may struggle a bit to identify other possible approaches. No alternative will be perfect. But once you have considered several and listed the advantages, disadvantages and overall chances of success for each alternative, you will be in a better position to settle on a plan with greater potential.
Article reprinted with permission from Strategic Services. All rights reserved.
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