This is a blog covering various in-depth topics relating to innovation and enterprise from a different perspective. It aims to draw upon research findings undertaken by CEMI that are not readily available through other channels.
Post date: Friday, November 19, 2010 - 15:29
Strategic planning is one of the most difficult challenges facing business owners and managers, but there is no single approach that is suitable for all firms. Knowing what is appropriate for your specific circumstances is essential.
Many business managers struggle with the notion of strategic planning. While they recognise that having a well considered business or strategic plan is useful, they often don’t know how best to go about putting one together. What should be in the plan? How much detail? How far ahead should we look? These are common questions asked and then finally, what is the benefit of all this planning when things might change tomorrow?
Strategic planning is uncommon in small firms and most have largely operational plans if they have any formal plans at all. Research into the benefits of planning to a small firm highlights that the key to success is less the formality of the plan, and more how well the owner-manager can understand what the plan means. When faced with a given environment in which to run their business, the way in which the manager configures their business and how effectively they implement their strategy are the keys to success.
There are four generic planning responses depending on the conditions the business faces which we have named the Shopkeeper, the Salesman, the Administrator and the CEO. The Shopkeeper is a planning response that is appropriate when the market is certain with stable customers and few foreseeable threats, and the product or service is simple, with known technologies and few complexities in its production. The Shopkeeper’s planning needs to be mainly operational in nature. Their focus is on fine tuning the business with attention to good financial control and reporting. Innovation is still possible, but it is largely incremental in nature.
The Salesman is appropriate where the market environment is uncertain with strong competition and customers who may be less loyal or stable in their buying patterns. Despite this market uncertainty the Salesman has a well proven product or service that is simple in terms of its production operations. In this case the appropriate strategy is to focus on marketing and sales. Planning is strategic but intuitive in nature to allow flexibility in a dynamic market.
The Administrator is a planning response appropriate in conditions where the market is certain and stable, but the complexity associated with production of the product or service is high. In this situation the best approach is to focus on formal operational planning, with attention to quality assurance, enhanced cost control and people management. Innovation for the Administrator is likely to be more about process technologies and cost saving. The strategic focus for the Administrator is on operational efficiency.
Finally, the CEO is an appropriate planning response for a situation in which the market environment is uncertain and the product or service is complex to produce. The focus for the CEO is on strategic transformation and they are best served by formal, strategic planning with attention given to innovation in product technologies that are generally more radical in nature. This type of strategic challenge involves more risk as both product and market conditions are unknown.
As you look at your own business ask the following questions:
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How certain or uncertain is your firm’s market environment?
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How complex is the operational process required to generate your product or service?
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If simple and certain be a Shopkeeper and fine tune your business;
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If simple but uncertain be a Salesman and focus on market development;
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If complex but certain be an Administrator and focus on operational efficiency; and
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If complex and uncertain become the CEO and engage in formal strategic planning.
This article was first published in WA Business News.
©Tim Mazzarol (2010)
Post date: Friday, November 19, 2010 - 15:28
Management of a small business is different from that of a large one in many important ways, knowing the difference can be a key to survival.
In 1981 an article appeared in the Harvard Business Review written by John Welsh and Jerry White that was titled: “A small business is not a little big business”. The main point of their article was to highlight the fact that small firms should not be viewed as posing the same management problem as large ones. This is due to the problem of resource scarcity, a major constraint for the small business manager that is not present in large firms.
This scarcity of resources is widespread and can include a lack of money, time, employees, floor space, equipment and managerial talent. Small firms cannot easily survive strategic mistakes, which many of their larger counterparts might simply write off somewhere in their balance sheets at the end of the financial year. The majority of small firms are heavily dependent on continuous cash flow to keep solvent and cannot easily cope with sudden shocks such as changes to government policy, or the loss of a major client or contract.
Resource scarcity also impacts on the small firm when it attempts to grow. By its nature growth requires more resources than stasis and the small firm must find people, equipment and of course money to fund it all. Fast growth can be a killer for small firms if they lack the necessary working capital to fund the expansion, and then the managerial capacity to deal with the new workloads. If the cash flow cycle is not adequately planned for and managed, the small firm can find itself running towards insolvency despite having a full order book and a busy workforce.
As Welsh and White explained in their article, the difference between small and large firms is the magnitude of the changes that are produced by growth. In large firms the relative rate of growth is typically modest; as such their financial statements indicate a system that is mostly in equilibrium. By contrast the small firm is rarely in equilibrium, the firm’s working capital requirement fluctuates substantially as does the cash flow. The amount of cash at bank is the primary focus of the owner manager in a small firm, but this will be determined by the firm’s break-even point, or the sales required for break-even. In a growth cycle the small firm’s break-even point will move as the business takes on more costs either variable or fixed. Unlike the large firm, growth in a small firm often sees overheads jump in steps, which moves the break-even point significantly, while revenues rise in a linear manner.
What this means is that for most small firms cash flow is more important than profit or return on investment figures. Maintaining sufficient liquidity to meet working capital requirements is the most important issue. The small business owner-manager is also likely to be treated quite differently than their counterpart from the big firm. Raising money for large firms is usually easier than for small ones, as the later lack the equity to use as leverage and often have negative equity in their balance sheet. The owner-manager is usually forced to put more risk over their family home to raise the necessary funds.
Little has changed since 1981. The recent Global Financial Crisis has hit the cash flows of many small firms and the forthcoming return to growth will impose substantial challenges. Keeping an eye on the strategic goals is important for managers in small firms, but keeping watch on the basics is essential.
In summary:
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Focus on cash flow as a priority.
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Forecast your working capital requirements against future planned growth and try to reduce this requirement over time.
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Monitor your break-even sales on a regular basis and adjust against cash flow forecasts.
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Recognise that turnover is less important than profitability, which is less important than liquidity.
This article was first published in WA Business News.
©Tim Mazzarol (2010)
Post date: Friday, November 19, 2010 - 15:25
For small to medium sized firms there are only three generic strategic options and each requires careful and considered attention in order to get the strategy right.
Setting strategic goals is a difficult challenge for many managers. Knowing what strategic options you have available and the implications of choosing between them is a dilemma facing businesses from all industries. For small to mid-sized firms (e.g. those with fewer than 200 employees) there are really only three generic strategic options available.
The first of these options is what I call “stasis” or business as usual. While it might appear to be a do nothing strategy at first glance it is actually a very challenging environment for a manager or business owner. My research suggests that small firms that chose this strategic option are not passive. The majority of these firms was well managed and had recently experienced a steady period of growth before choosing to consolidate. For owner-managers who chose stasis for a secure or comfortable lifestyle, there is still no room for complacency. Attention needs to be given to improving the efficiency of the business to boost profitability through enhanced processes. It is a fairly inward looking strategy, but not an idle one.
The second option is exit, which can take one of two forms. The first is the abandonment of the business and closure, while the second is the transfer of ownership or control to a new management team. The abandonment of a business is not always a disaster, research into small business failure suggests that most owner-managers simply wind up their operations in an orderly manner and move on. This can be forced on them by adverse economic conditions, or a personal decision to give up the business and to do something else with their time. For owner-managers who are planning to exit by transfer of ownership or control there is a need to get the business ready for trade sale, or to groom a successor. Whatever exit strategy is chosen there is much work to do. The business must be prepared for sale, succession or orderly wind up. This may involve valuations of the firm, systems and team building, training successors and tidying up the balance sheet.
The final option is growth. To grow a business requires attention to either a new product or service that can be sold to existing customers, or moving into new markets with existing products and services. In some cases it might involve trying to launch new products in new markets. Each of these strategic directions will impose different levels of risk and possible return. The more change that the business has to face the higher the risk is likely to be. Taking a new product to a new market is potentially a big risk as it moves the business into unknown territory on both product and market levels. Setting a growth strategy needs careful planning with a robust business model and tight controls over cash flow and operations.
Whatever strategic option you choose will require careful planning and a good deal of effort. Growth is not always the most desirable option and exit should be an orderly process. Even stasis is an option that will keep you busy as you tidy up the books, tighten up the operations and ensure that you can sleep soundly knowing that everything is under control.
In summary each of the three options requires attention to the following:
- The Growth Option – focus on innovation, new products or new markets, setting a clear vision for the future, strengthening your balance sheet and working capital, enhancing your strategic networks and stress testing your business model.
- The Stasis Option – fine tune your business, review efficiency and contribution margins of existing products and services, tidy up the balance sheet and boost profitability, strengthen your existing customer and supplier relationships and look for ways to enhance loyalty across the supply chain.
- The Exit Option – focus on valuation and building systems and teams, tidy up the balance sheet and trim away waste through efficient financial control and reporting, groom a successor.
This article was first published in WA Business News.
©Tim Mazzarol (2010)
Post date: Friday, November 19, 2010 - 15:23
The ability to set clear long term strategy is one of the most important things a business owner can do, but it also one of the most difficult. Overcoming your own strategic myopia is even more critical in today’s fast changing world.
Strategic myopia is a condition in which the management of a business can see clearly those things that are to take place in the short term, but have only a fuzzy view of what their future might be over the longer term. Many owners of small firms and even the senior managers of many larger firms, suffer from strategic myopia.
To test for strategic myopia ask the following questions. Do you have a clear vision for the future of your business over the next 5 to 10 years? Do you share this vision with your employees and other key stakeholders such as customers on a regular basis? Does your business have a formal, written vision, mission and values statement, and a formal, written business plan that is reviewed regularly? Do you systematically monitor your industry for trends and look for threats or opportunities? If you own your own business, do you have a well considered succession plan for your own exit, and have you started preparing for the sale of the business, or the grooming of a successor? Does your business planning look beyond the next year? Finally, do you regularly talk to customer and suppliers to gauge their views on how your business is performing, how the industry is trending and how you might innovate to add value?
You might have a yes to some of these questions and a no or maybe to others. Whatever your answers, you must recognise that strategic myopia is always looming in even the best run business. The managers of large, well run firms spend a lot of time and money on strategic management issues. For the owner-manager of a small firm this is not always possible. Most small business owners work 35 to 50 hour weeks with 30 percent working longer. With such long hours working in the business it is difficult to find the time to work on it in a strategic way, and strategic planning is often more difficult than the more routine operational planning.
My own research with colleague and co-author Professor Sophie Reboud from Burgundy School of Business in Dijon, France, of has shown that a formal approach to strategy setting is associated with above average performance. We caution that the mere possession of a written business plan is no guarantee for success in and of itself. However, formality in planning and strategy was found to be associated with owners who had formal business qualifications; a strong sense of how to delight their customers, and a clear understanding of what core skills their firm’s needed to achieve this. Our research also highlights a link between formality in strategic planning and such things as a strong growth orientation for these business owners, formal use of quality assurance, a capacity to network strategically and possession of a clear strategic vision for their firm.
In essence the pattern that emerges is of a relationship between enhanced business performance, long term vision and formality in the planning and strategy setting process.
As we enter a new year and what is looking to be another period of economic growth within WA it is time to address any strategic myopia that might be lingering inside your business by:
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Start thinking about where you want your business to be in 5 years time – what is your vision?
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Also consider where you will be in this future vision – still in harness or retired?
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What political, economic, social or technological forces are going shape and change your industry over the next year years?
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What are the critical resources that you must possess if your firm is to succeed in this environment?
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What are the gaps in your resources that you must close if you are to fulfil your vision?
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What assistance can you get from leading customers, key suppliers and third part y advisors to help you shape this strategy?
This article was first published in WA Business News.
©Tim Mazzarol (2010)
Post date: Friday, November 19, 2010 - 15:33
By its nature innovation is a strategic process and there is a close association between the type of innovation a business might seek to commercialise and the type of strategy it should adopt to see this project brought successfully to market.
In an earlier article for the Business News I explained that our research into the strategic behaviour of small firms had shown at least four generic strategic planning responses. These were the “Shopkeeper”, “Administrator”, “Salesman” and the “CEO”. Each of these is a response to a given set of conditions relating to the uncertainty found within the firm’s environment and complexity associated with its operations.
The Shopkeeper has a simple structure or product and a certain market environment. Their strategic response is to fine tune the business. The Administrator has certainty in the market, but a high level of complexity in their organisational structure or process. They need to focus on structured operational level planning. The Salesman has a fairly simple product or process, but faces an uncertain market. Their strategic response needs to be a marketing and sales focused intuitive strategic planning. Finally, the CEO faces both uncertainty in the market and complexity in their product. Structured strategic planning is their best response.
Research being undertaken by the UWA Business School with partners in 11 other OECD countries is investigating the relationship between innovation and strategy. At time of writing we have collected a database of 567 cases of firms seeking to commercialise an innovation. These innovations have been assessed using a simple screening framework that evaluates the anticipated return to investment in the innovation. This measures the anticipated sales, profit margin and life cycle of the product. Together these three variables generate a simple formula to initially screen the type of innovation being developed.
Our analysis suggests that there are several broad types of innovation that emerge from this framework. Each of these types of innovation has different market and product characteristics that require a different strategic planning response. For example, one innovation (the “Shrimp”) has modest sales, profit and a relatively short lifecycle. This incremental innovation is probably best managed using the “Shopkeeper” strategic planning response, with its focus on informal, operational planning.
At the opposite extreme is a radical innovation known as the “Champion”, which has substantial sales at a national or global level, with significant profits over a long lifecycle. This type innovation poses substantial challenges to the business seeking to commercialise it and demands a structured, strategic planning response as typified by the CEO.
A third type of innovation is the “Gadget”, so called because it has modest sales and a short lifecycle, but generates a high rate of profit. This type of innovation is best dealt with by employing a “Salesman” strategy involving strong marketing and sales efforts to take advantage of the short market window of opportunity.
Another type of innovation is the “Joker”, one that has high sales and a long lifecycle, but a low profit margin. This is best managed with the planning response of the Administrator, where the focus is on cost reduction to ensure that whatever profit can be secured from the innovation is as large as possible. The Administrator is about operational efficiency and process innovation aimed at lowering cost.
This research project is ongoing, but it highlights the importance of matching strategic planning to the innovation. Of concern is our finding that many firms with a “Champion” innovation are seeking to employ “Shopkeeper” planning behaviour in their commercialisation process. This is particularly the case in small firms where intuitive, ad hoc planning is common.
If you are seeking commercialise an innovation ask the following questions:
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What will this new product or service generate in future sales and over how many years?
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How profitable will this new product or service be?
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Have you fully researched your customer’s willingness to accept this new innovation?
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Do you have appropriate protection of your intellectual property rights?
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Do you have the necessary skills and resources to launch your innovation into the market?
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Is your approach to strategic planning appropriate for this type of innovation?
This article was first published in WA Business News.
©Tim Mazzarol (2010)
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