Do small and medium companies need a strategy?
During my 10 years of experience in management consulting, a good number of customers asked me: “But, Cosmin, we are just a small company with few departments, why do we need a business strategy?”.
And while this question initially confused me, now I understand where this misunderstanding stems from. So, in this article, I will try to give a detailed answer to why a company at any size needs a strategy and why for a small and medium business it is crucial to have one.
What on earth’s name is a strategy?
The concept of strategy has been stretched from Michael Porter until today to a plethora of things. In their desire to present their work as vital, people (mainly consultants) attach it to everything from utopian “sky-is-the-limit” visions to rules for posting a photo on a website (yes, the infamous Instagram strategy).
To make matters worse, for many people (again mostly consultants), the word “strategy” has become a verbal tic. Business speeches branded marketing as a “marketing strategy”, information as a “big data strategy”. Cut some prices and this will transform into a “low-price strategy”.
A word that can mean anything has lost its value.
A business strategy defines the company’s winning aspirations, as well as its choices of where to play and how to win, the capabilities, and the management systems that drive the accomplishment of those aspirations.
None of those elements by itself can substitute a strategy. All of them need to be present to trigger alignment and intentional actions at every level of the organization to achieve the desired results.
A bad strategy is more than the absence of a good strategy, is a false idol built on wrong foundations. The most common examples of bad strategies are the ones full of buzzwords that, in essence, do not say anything.
Here is an illuminating example of a bank strategy from Richard Rumelt’s book Good Strategy/Bad Strategy: “Our fundamental strategy is one of customer-centric intermediation”. So Rumelt reflects on it: “The Sunday word “intermediation” means that the company accepts deposits and then lends them to others. In other words, it is a bank. The buzz phrase “customer-centric” could mean that the bank competes by offering depositors and lenders better terms or better service. But an examination of its policies and products does not reveal any distinction in this regard. The phrase “customer-centric intermediation” is pure fluff. Pull off the fluffy covering and you have the superficial statement “Our bank’s fundamental strategy is being a bank.”.
Because of its profound nature, the business strategy cannot be specific to a business function. Having marketing and sales departments pursuing different strategies is like having the left foot and the right foot moving into different directions. Business functions align with the overall strategy by creating consistent strategic initiatives and performance indicators. A company can have a unit or product-specific strategies, but they are always supporting a common, all-encompassing company strategy.
Owners’ problem
As an owner or manager of a small and medium business, there are two aspects of your business that call for your time. One is operational, and from my experience, this means absolutely everything from sales to accounting and from production to customer service. The second one is strategic including defining or revising your aspirations, choices, capabilities, and initiatives.
To be successful, both levels are vital. Unfortunately, most owners spend virtually all their time at the operational level. It is not hard to understand why: upset customers, employees’ vacations, administrative tasks create a never-ending demand for attention.
But as a result, the business is going blindly wherever the wind will take it. And this is a highly undesirable state, no matter how small the enterprise is.
Many entrepreneurs start businesses to seize short-term opportunities without thinking about long-term strategy. Successful entrepreneurs, however, are quick to make the transition from a tactical to strategic orientation. This allows them to sustain their success beyond the current moment and answer the question: “Where the money will be tomorrow?” so that they can begin to build crucial capabilities and resources to move in the right direction and be there in time to seize the opportunity.
I would advise you, as an owner or CEO to always ask yourself the following questions:
Do I know where I am going?
A company will get in trouble or, at the very least, will miss attractive opportunities, if it does not engage in purposeful actions.
An entrepreneur who wants to build a sustainable business must formulate an explicit goal and make sure that it possesses the capabilities and resources to pursue it. At the same time, the goal or the means should be sufficiently different from the ones chosen by the competitors to avoid cost battles, which are detrimental for all parties involved.
Can I grow and generate profit?
Is the market pool big enough? Are the customers willing to pay and purchase my products or services? Do I have a competitive advantage in that market? Can I sustain my costs?
Businesses based on an entrepreneur’s willingness to work hard usually confront other equally determined competitors. To ensure long term success, the company should have a thorough understanding of the surrounding environment and the value they bring and will bring to their customers. New products or geographic expansions should be carefully evaluated for their potential to generate lucrative business as growth per se does not translate into profit.
Can I do it?
This one probably is the toughest because it requires honesty to oneself and a critique look. Great ideas and hard work do not guarantee performance. Entrepreneurs must examine three areas—resources, processes, and their profit formula —to evaluate their ability to make progress.
Without a clear view of where they are going and what they need to do, companies are highly likely to fail. According to the US Bureau of Labor Statistics, about 20% of the small businesses fail in their first year, and about 50% fail in their fifth year. Furthermore, a study of companies over 10 years demonstrated that small and medium enterprises with strategic orientation have better performance in terms of profitability and growth than their counterparts without a generic strategy.
I do not wish to state that having a strategy is mandatory to succeed. But having a clear definition of winning and building your resources and actions around it helps the organization make choices and move forward. As A.G Lafley, the former chairman at Procter & Gamble Co said: “a strategy is not about achieving perfection, it is about shortening your odds”.