Small Business Management MGMT5601 Topic 4: Planning and Strategy in Small Firms Professor Tim Mazzarol UWA Business School SBM MGMT5601 UWA Business School MBA Program tim.mazzarol@uwa.edu.au
Learning outcomes In this topic you should learn how to: Prepare a strategic plan for a small business Understand the role of planning in the small business Recognize the importance of strategic focus and direction Understand the process required to undertake an industry and competitor analysis Conduct a SWOT analysis Determine the competitive positioning best adopted by a small firm Mazzarol 2017 2015 all rights reserved
The importance of planning If you fail to plan you are planning to fail! Benjamin Franklin Having a formal business plan is not essential to small business success But Owner-managers that have one are more likely to succeed than those who don t.
Small Business Case Eden Organix
Discussion Small Business Planning and Strategy Video What were the key considerations identified in starting up a new business? What was their approach to business planning? How did these successful business owners manage their finances? What was their approach to marketing and creating customers?
Lack of strategic thinking Small business owners suffer from Strategic Myopia Short NOT long term vision Most owners do not plan because they: lack the time to do this. lack the knowledge & skills to develop a plan. are unwilling to share ideas & strategies.
Strategic orientation of small firms Managerial Market oriented Seeks competitive positioning Technological Seeks a competitive advantage via new product or technology application Traditional Risk averse Avoids growth or major shifts in strategy Impoverished Lacks coherent strategy Reactive to market pressures Source: Borch & Huse, 1993
Three Generic strategic options Growth FOCUS: Market opportunity Innovation Profitability NEEDS: Visionary leadership Strategic thinking Exit FOCUS: Preparation for sale Succession planning Wealth creation NEEDS: Operational management Stasis FOCUS: Consolidation & Efficiency Low stress & Profitability NEEDS: Operational management Source: Mazzarol & Reboud (2009)
The value of planning Few SME have formal plans. Lack of formal planning has been linked to failure. Debate continues over the link between formal planning and success. Formal planning does appear to be linked to enhanced start up survival. enhanced growth performance.
The value of planning in entrepreneurial ventures Value of Planning (49 empirical studies) Small firms gain benefits from planning Specific nature of this remains unclear Entrepreneur remains the key element Past management experience Education Entrepreneurial orientation Most entrepreneurs don t formally plan Formality not linked to performance More support for sophisticated planning Used by entrepreneurs to mitigate risk Source: Mazzarol & Reboud (2009)
What does research tell us about the value of planning? A review of 46 quantitative research studies found: Both young and established firms benefit from planning. Planning is of more value to small business owners. In uncertain environments basic planning is a better option. Focus on contingency plans and the control of resources. Planning works best in situations where quality and quantity of information is high. More formal and sophisticated planning significantly improves performance. Source: Brinckmann, Grichnik & Kapsa (2010)
Major types of business plans Application for Finance Bank Financing Collateral Capacity to repay Character Venture Capital Team structure Market opportunity Product innovation Return on investment Payback period Plans for Customers & Suppliers Customers Reliability of supply Quality of product Pricing Innovation Suppliers Market share growth Maintenance of reputation Loyalty of relationship Plans for Internal Use What is the vision? What is the mission? What are the values? What are the critical assets? What are the KPIs? When is the deadline? Who is responsible?
The Do s and Don ts of business plans DO s A plan must be simple A plan must be accurate A plan must be useful Don ts Plans cannot save management from decision making Plans should not be rigid or inflexible Plans are only as good as the people who carry them out
Small business planning for dummies
Outline of a business plan 1. Executive Summary 2. Market Analysis 3. Company Description 4. Marketing & Sales Activities Key issues Distinctive competencies Industry & outlook Target markets Market research Lead times for orders Competition Regulatory requirements Nature of the business Distinctive competencies Overall marketing strategy Sales strategy Products & Services Operations Management & Ownership Funds Required & Application Description of products/services Product life-cycle Copyrights, patents, trade marks, trade secrets R&D activity Production & service delivery process Production & service delivery capability Operating competitive advantages Suppliers Staff structure Key managers Plans for new hires to management Legal structure of business Owners Board of directors Current funding requirements Funding required over next 5 years Use of funds Long-range financial strategies Financial Data Appendices Historical financial data (3 to 5 years) Future forecasts next 3 to 5 years Analysis of financial data (e.g. ratios & trends) Resumes of key managers Photos of products Professional references Market studies Patent disclosures Insurances Source: Ernst & Young (2001)
Blueprint for a business plan Focus & Direction What is the business of this business? What should this business be like in 5 years time? What will my role in the business be in 5 years time? What standards will be needed for its operation? Financials & Customers Who is my customer? What is my value proposition to my customer? What values does our business work by? How much income is needed to make this worthwhile? Organize around functions NOT people. Organizational Design Prepare an organization chart for the blueprint structure. Prototype the positions and replace yourself with a system. Time Frame When will you complete this prototype? Where will you be? How will you be in the business?
How to approach an industry analysis Analyze the current industry structure Existing competitors in the industry (strategy, structure, rivalry) Potential for new entrants in next 3-5 years Possible substitutes (emerging technologies) The bargaining power of customers The bargaining power of suppliers What are the Rules of the Game? Analyze historical changes in the industry structure PEST Analysis: Political factors (e.g. government regulation or taxation) Economic factors (e.g. business cycle forecasts) Social factors (e.g. consumer tastes, public opinion) Technological (e.g. disruptive innovations) Analyze future trends in the industry structure Define the scope what are the boundaries of your industry Identify key stakeholders (e.g. competitors, customers, suppliers, third party actors) Identify key trends (e.g. PEST) Identify key uncertainties (risk assessment) Develop initial scenarios (best case, worse case) Assess plausibility of each scenario Develop learning scenarios (case studies) Indentify knowledge gaps Develop quantitative models (business case analysis) Evolve decision scenarios (what should we do?) Source: Lewis, 1999
Competitor analysis Current Strategy Capabilities What the competitor is doing and can do? Competitor s Response Profile Future Goals What drives the competitor? Assumptions Is the competitor satisfied with its current market position? How is the competitor currently competing within the market? What are the competitor s key strengths and weaknesses? What likely moves or strategy shifts will the competitor make? Where is the competitor vulnerable? What are the competitor s likely future goals based on market signals? What does the competitor assume about itself and the industry? What will provoke the greatest and most effective retaliation by the competitor?
SWOT Analysis Strengths Internal analysis Factors within an organisations control Advantages over competition Opportunities External environment Factors largely beyond the control of people in the organisation S O Favourable circumstance of event, potential or existing W T Weaknesses Internal analysis Factors within an organisations control Disadvantages over competition Threats External analysis Factors largely beyond the control of people in the organisation Unfavourable circumstances or events Checklist: Strengths + Weaknesses Management Employees Finance Legal Products and services Purchasing Research and development Distribution Marketing Facilities Position in the industry Opportunities + Threats Political Economic Social Technical
Generic positioning strategies Broad Target Market Cost Leadership Differentiation Niche Target Market Focus Cost Leadership Focus Differentiation Process Innovation Product Innovation Source: Porter, 1990
Criteria for sustained competitive advantage Elements of Sustained Competitive Advantage: How the firm competes marketing, production, financing Where the firm competes location, markets, segments The basis of competition skills, assets, resources For sustained competitive advantage a firm s resources must be: Valuable exploits opportunities or neutralizes threats Rare not available to competitors Imperfectly imitable difficult to copy Without strategically equivalent substitutes Source: Aaker, 1989; Barney, 1991
Product-Market Growth New Product RISK Growth by New Product Development Growth by Diversification Existing Market New Market Consolidation Growth by New Market Development Existing Product Source: Ansoff (1965)
Strategic planning response types Complex RISK Structured Operational Planning Administrator New Product Existing Market Medium risk Operational efficiency CEO New Product New Market High risk Strategic transformation Structured Strategic Planning Certain Uncertain Shopkeeper Salesman Ad-Hoc Operational Planning Existing product Existing market Low risk Fine tuning Existing Product New Market Medium risk Market development Intuitive Strategic Planning Simple Source: Mazzarol & Reboud (2009)
Strategic response types Source: Mazzarol & Reboud (2009)
Threats Business Model Analysis Opportunities Competitive rivalry New market entrants Substitutions Regulatory Supplier power Buyer power Social & demographic Environmental Lean Canvas Products & Services Customer Value Proposition Lean Start-Up Distinctive Competencies Unmet market needs Ability to add value Ability to reduce cost Niche or mass-market Product innovation Process innovation Market innovation Dynamic Capabilities VRIO framework Process weaknesses: Management Organisation Learning Positional weaknesses: Technical, financial & physical assets Systems Path weaknesses: History, culture Paths Path dependencies Positions Processes Coordination & Learning Valuable Rare Difficult to copy No substitutes Organisational ability Types of assets: Tangible - Intangible Isolating mechanisms Weaknesses Gaps in knowledge & resources Technical, financial & Physical assets Mazzarol 2017 all rights reserved Strengths
Developing a change plan What is the current capacity within the business of each area and is there room for change? Marketing Products & services Markets Customers Geographic coverage Distribution Channels Competition Sales organization Distribution Suppliers Promotional Mix Resources Needed Premises and Access Equipment Employees Materials Transport & Logistics Selling Stock Working Capital Requirements Fixed Capital Investment Management Operations Management Marketing Management Financial Management HR Management Production Systems ICT Systems Third Party Financing What will be the likely impact on each of these areas of implementing your new strategy?
Elements of a management system Any good management system must contain a process of linking the planning to the implementation. Report Forecast Key elements include: Implement Follow-up Schedule Plan 1. Forecast develop a forecast of future sales and the cash flow from these sales, plus what profit can be generated from these sales? 2. Plan prepare a business plan based on these forecasts that also considers your firm s ability to supply the demand with its existing resources. 3. Schedule develop a work flow system that schedules the timing of anticipated work and allocates resources. This should factor in your cash flow and expenditures over the time period. 4. Implement action your plan and work schedule through trading keeping regular data on progress. 5. Report generate report at frequent intervals that compare forecasts against actuals and use this to review your forecasts.
Principles of an effective management system Transparent Measurable Work must be related to time Interdependent Management System Performance expectations impact productivity Continuous improvements Manage the whole by managing The parts
FORECASTING Strategy Budget Quality PLANNING MANAGEMENT SYSTEM APPLIED Work Standards Standards Review Business Plan FORECAST WORLD REAL WORLD Volume Forecast Forecast Review Resource Schedule DPSC HRM System Daily Review FEEDBACK Weekly Review Actual Volume Backlog Control Variance Control Management Report Actual Market Skills Flexibility Matrix Quality Controls DWOR SCHEDULE &CONTROL REPORTING
Case study Comfort Homes How would you profile James? Shopkeeper Salesman Administrator CEO If James were to prepare a strategic plan for the future of his business what key things should he consider?
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