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This paper is most relevant to entrepreneurs or management teams that have a clear vision and mission for their business and are in the process of developing the primary strategies to be followed. It is closely linked to other papers in this series, most notably Developing a Strategic Business Plan which offers a framework for a strategic plan and Getting New Business Ideas. The development of a suite of strategies is an iterative process and involves circular thinking on the basis that optimal strategies will evolve gradually and be very interdependent. Accordingly, the best way to utilize this paper is to review it in its entirety and then use it as a checklist and basis for brainstorming and systematic analysis.
A venture is most prone to failure during its first three or so years of operation - the so-called 'valley of death'. A key to getting through these early years is to avoid the obvious mistakes. Generally speaking, businesses fail for significant and substantial reasons which are often very evident to outsiders. Insiders often fail to see them because of their closeness, determination and so on.
Basic reasons for failure include the following:
|Underestimating start-up costs (for operations & capital expenditure).||Misjudging the size or growth of the overall market.||Lack of relevant sectorial experience.||Inability to supply profitably to required price.||Under-investment in equipment etc.|
|Insufficient funds or access to top-up finance.||Overoptimistic estimates of market penetration & shares.||Insufficient functional breadth.||Problems with maintaining quality standards.||Excessive overheads (relative to scale of operations).|
|Wrong mix of funds (e.g. too much debt and gearing too high).||Delays in securing or developing distribution channels.||Unresolved differences of opinion.||Restricted range of offerings.||High operational costs and/or low productivity.|
|Over reliance on trade credit (receivables).||Underestimating the strength of competitors.||Unreal expectations.||Lack of innovation (me-too offerings).||Poor capacity utilization.|
|Mistaking profit for cash flow (see here).||Misreading customer requirements.||No formal or clear structures.||Problems sourcing supplies.||Inadequate physical distribution.|
|Overoptimistic projections or overtrading.||Lack of promotion & customer awareness.||Ineffective financial & managerial control systems.||Offerings out of line with customer needs.||Inappropriate business location.|
|Unable to withstand interest rate increases.||Inability to handle an economic slowdown.|
Clearly, there are very many other reasons as to why businesses fail. The key point is that causes are usually very apparent (especially with hindsight) and the trick is to anticipate them by executing appropriate strategies at the outset. Three examples:
Given that reasons for failure are often both simple and clear, it should (in theory) be possible to reduce the possibility of failure through prior experience, forethought and effective planning.
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2. Characteristics of Successful Businesses
A successful emerging growth business is likely to display many of the following characteristics:
Behind every characteristic there should be an explicit strategy designed to increase the chances of success and not simply aimed at reducing the likelihood of failure. For example:
3. Clarify Existing Business Strategies
In planning new strategies for a business, it is essential to define its current (implicit or explicit) strategies for the business as a whole and its main functional areas - finance, marketing, sales, management, operations etc. Do this by setting out a series of short strategic statements. Some examples:
To get at the root (fundamental) strategies, critically examine each statement. For example:
Up to eight statements should suffice to cover all the essentials. Ask whether they contain the seeds for significant growth or merely represent hedges against possible failure.
Undertake separate analyses for each business unit if a large corporation is being appraised.
4. Look into Future SWOTs for Strategies
An effective SWOT (strengths, weaknesses, threats & opportunities) analysis is a key component of strategic development. It can prompt actions and responses:
If the business is seeking significant growth, it is important to fast-forward and assess SWOTs as they might exist a year or two hence. This will help ensure that strategies are ambitious and robust and that emerging issues are anticipated.
Have a look at the discussion on SWOTs and related matters in Developing a Strategic Business Plan (and especially Sections 1.3 to 1.5).
5. Basic Strategic Planning Approaches
The primary strategic options for a new or established business include the following:
The preferred option is likely to be very influenced by the dynamics and prospects of the sector in which the business operates. For example, if the sector is under serious long-term threat then the only realistic options might be to hang in or harvest.
The two main approaches to strategic development for an established business can be classified as either organic or quantum as illustrated below:
In the case of a start-up venture, organic and quantum approaches translate into soft or hard start-up strategies. An example of a soft start would be a software company which evolves from a part-time business into full-time service provider and then progresses into software products (classic "back room" start). Another example, would be an engineering company which starts in a shed and gradually moves into a proper premises ("garage" start).
Soft start strategies can be very effective as they allow entrepreneurs to learn the trade (and make mistakes) without incurring major, irrevocable (and maybe premature) commitments. Hard starts are obligatory where substantial investments (in R&D, market or assets) or resources (technology, manpower etc.) are needed from the outset. It may be possible to soften a hard start by renting (rather than buying) premises; leasing equipment (instead of purchasing); acquiring a franchise (in lieu of developing a new brand, systems etc.); entering into a joint venture; or subcontracting manufacturing, distribution, accountancy services and so on.
6. Creating Strategic Combinations
This Section presents several different combinations of strategies which could be used to help develop a range of strategic options. These can be strung together to form explicit strategic statements of intent. For example:
The purpose of this section is not to encourage a form of planning by words but to simply expose the range of possibilities that might be considered when formulating explicit strategies. These can be applied equally to start-ups and established businesses. Of course, the big distinction is that the start-up is building strategies from scratch without the benefits of any market position, momentum or pre-existing strategies.
Any selected suite of strategies must be integrated and internally consistent and in-line with the business's broader vision, mission and objectives (see Developing a Strategic Business Plan). There is little point in a business claiming to be technologically advanced if its R&D spend is sub-critical, or aspiring to become a leading brand if it has neither products, nor funds nor distribution to ensure this could happen.
Basic thrusts of a business (to be continued, deepened or initiated):
Primary product and market combinations include:
Investment possibilities include the following:
Possible future directions of main activities (Xs signify desired action):
Alternative technology acquisition routes include:
Funding strategies could embrace the following sources and forms:
The range of quantum leap possibilities could include:
7. Compiling Strategic Statements
Strategic statements can be defined as broad indicators of the direction(s) in which a business should be driven in order to fulfil its vision/mission while taking realistic account of its resources, constraints and opportunities.
They also serve as the link between the a business's objective and actions plans and should result in a series of integrated sub-strategies and action programs with goals, budgets, timetables. These can be most effective when linked to specific functional areas. For example:
Limit the number of strategic statements to what can be realistically achieved within a realistic time frame and, if necessary, prioritize them. It is possible that just one strategy is needed for each of the main main functional areas listed above. See the latter parts of this Sample Strategic Plan for an example of a set of strategic statements. It might help to summarize and sequence the key elements in a color-coded Gantt chart or table like the following:
8. Next Steps towards a Strategic Business Plan
Once a set of strategies has been developed, it will almost certainly need detailed planning and reality testing. This could embrace market research, acquisition scouting and all forms of planning ranging from investment appraisal through financial projections to business plans or corporate submissions. Useful software-related resources to assist these processes include:
Also, the following white papers are central:
For a start-up, additional planning activities could include (in no particular order) management team formation, R&D, market research and entry planning, feasibility studies and preliminary fund raising.
Be realistic about the rate at which a management team can implement strategic change and allow for the fact that these may involve factors totally outside the business's control. It may be better to implement a few strategic initiatives successfully and on time rather than a multitude badly or only partially. The solution here is to prioritize.
9. Introducing PlanWare
PlanWare develops and sells a range of financial planning packages - Exl-Plan and Cashflow Plan - for businesses of all sizes & types. Trial versions of all products can be downloaded from our PlanWare site and many other sources on the 'Net.
PlanWare also features:
10. Copyright & Legal Stuff
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