After talking to many owners and managers of small to medium sized enterprises (SME), it still surprises us how many of them are operating in what I call a “strategy free zone”.
Many of these same people believe that corporate strategy is simply an activity performed by, and only relevant to, large multi-national business or government agencies. The classic responses when strategy is raised are “why do we need a strategy? Or we are busy running a business, we don’t have time for strategy.” Ironically, it’s the same people who are typically running businesses that are struggling to compete against competitors, fighting to maintain market share, or simply not meeting their goals. Strategy is just as important, if not more important to SME type businesses, as it is to big businesses, especially in these changing times, where all companies are needing to adapt to survive.
Before we get further into this, we need to be clear about what strategy is and what strategy is not, as many people have their own interpretations of strategy. Strategy is about setting the long-term direction of a business, based on a deliberate set of choices. The ultimate purpose of strategy development is for a business to articulate where to play, and how to win. So when managers tell us that their strategy is to grow at X% per year, or increase sales by y%… sorry, these are not strategies; they could be the outcomes of a strategy, but by themselves they are not a strategy. Yet this simplistic target setting is the extent of the “strategy” of many businesses.
So how will a strategy help my SME type business I hear you ask? Developing a clear strategy helps on many different levels. Yes, by the end of the process you will have an impressive looking strategy map which helps articulate success for your business and illustrates what you are seeking to achieve. This is great for building employee engagement, as part of a business case to get funding, and is also an effective communications tool. But more importantly, proper strategy development forces people, including the owners or managers to understand their business strategically, to make tough decisions regarding how they will compete, and shows them where they stand in the context of their broader operating environment. From our experience, the decisions that are made as part of the strategy development process, are more valuable than the final strategy document itself.
To illustrate, in our view it is not possible for a business to begin an informed strategy discussion without understand their business model. While there are many different approaches to business model generation, ultimately they all look to clarify fundamental business drivers such as: key partners, key activities, key resources, value proposition, customer relationships, customer channels, customer segments, cost structures and revenue streams. By discussing these in detail it forces managers and business owners to think very deeply about their business, and specifically how they will compete against their competitors. For instance, is competition based on price, superior customer service, or offering a unique product? As you can start to imagine, there are clear trade-off decisions that must be made which are fundamental to how any business operates. For example, it is very challenging to offer superior customer experience, yet also be the cheapest. If you are focusing on superior customer service, is relying on online and remote channels to engage your customers the best bet, or is this segment looking for something more? Yet in our experience, these types of decisions are very rarely discussed in many SME type businesses. In fact many businesses we work with contact us because they do not have a clear understanding of these fundamental issues, have not made clear decisions, and are struggling trying to be all things to all people. As a result, they are failing to meet the needs of any customer segment, and as a result are struggling to generate sales or attract clients.
Once decisions around key components of the business model have been made, businesses can then begin to understand their competitive threat position in the context of their operating environment. Again, there are a few different ways to do this, but borrowing from Michael Porter’s work, businesses need to understand who holds the balance of power. For example, if you are competing based on product differentiation and there is only one supplier that can provide you with a key input for your product, then you may not have much room to move and you best focus on preserving this relationship. However, if there are many suppliers, you can use this to your advantage. It’s the same story from the customer perspective. Do customers have alternatives to you? If so, why will your customers choose you? What are you doing to stop them switching to a competitor? However, if your customers do not have an alternative, these factors will be less of a consideration. Instead you will focus on how to defend your current position, and maximise the opportunity you have.
The point is that strategy and strategy development is about more than simply setting a target and a nice strategy map. It is about gaining a deep understanding of your business within the context of its operating environment. As mentioned at the outset, ultimately strategy is about where to play and how to win. Given that the majority of SME type business are operating in a competitive environment, it still astounds us how many do not have well defined strategies, and how many businesses aren’t realising their full potential. The owners of these businesses need to dispense of the idea that strategy development is for big business only, and start to have serious discussions around the key strategic issues. Understanding your business has never been more important than it is now, during these changing times. The points touched on here are simply the tip of the iceberg. While focusing on operational issues may keep you in business today, focusing on strategy will keep you in business tomorrow. History shows there are many businesses that got this balance wrong and payed the ultimate price. (i.e. Boarders Books, Kodak this list goes on. These are just some of the companies we all recognise, not mention the numerous SMEs that have met the same fate.) At Clear Path, we specialise in working with business to provide clarity around these issues, and helping set them up for future success.
James Hamilton & NEIL HALLs
The founders have years of experience across a diverse range of industries and business areas. Their aim is to ensure the team at Clear Path Commercial Consulting use this experience and their individual knowledge and skills to help our clients in their own business.