And what they must do to succeed in the new economy
Please read Parts I, II, III, IV , and V of this post for background information.
The business downturn that STMs (small-to-medium size businesses) have experienced resulted from the lack of demand for their products or services. The fact that they are beginning to see an uptick in their business means that the market(s) they address is beginning to stir; demand is returning, things are happening.
But what is happening? This is an area of shortcoming for many STMs, they haven’t taken a hard and close look at their customers, their market(s), or their competition. Often the evaluation of their market comes as feedback from their sales people, who are hardly market researchers. Not that sales feedback is not important (it is) it just not complete, or sufficient.
And then there is the myopia brought on by the ‘rigidities’ that we have talked about, and the emotional attachment to something that has worked before, that is dear to the heart of the owner. The inability to change is made even harder by the lack of knowledge and understanding of what is happening in the market place.
Before an STM can (or should) develop any strategies they need a very clear understanding of what is going on in their market. Understand their customers changing needs, and if that customer is an OEM, the end-user’s changing needs. The STM must create a positioning statement for itself; this requires that it understands its competitor’s positioning.
Assessing the Market
This is where it starts to get tough for an STM, it’s kind of like them waking up in the middle of a desert, not knowing where they are, and not knowing how to get out? A good place for them to start, is to look at where they have been, kind of like "dead reckoning navigation". Knowing where you have been, is an indicator for where you are going.
This would also be a good time for them to perform a SWOT Analysis (Strengths; Weaknesses, Opportunities; Threats).
And at the same time they should examine and define their Intellectual Property (IP), highlighting the advantages and especially ‘values’ it delivers to their customers.
A business in a way is like a computer system, it will continue to work until something changes and when it does, just like with a computer, you must detect and define ‘what changed’ in order to solve the problem.
In essence an STM doing a SWOT analysis et. al, will detect if its business has ‘internal’ problems, or whether its problems are due solely to changes in its business environment.
Often their problems are attributable to both. The most likely changes in business environment are, Customers (needs). Competition and/or Technology. Some might consider (at this point) applying Porter’s Five Force Model (Competitive Strategy: Techniques for Analyzing Industries & Competitors, Michael E Porter, 1998) to the problem. OK for bigger companies, but in my opinion not a worthwhile exercise for an STM at this time, nor for this problem.
The most important consideration for the STM is the "customer"! Demand for their products or services dropped for a reason; the STM must discover that reason, and understand it. Understanding it means, understanding why the customer’s needs/wants have changed; or was it a change caused by end use, or by competitors; was it due to a change in technology?
These questions must all be answered by the STM, before it can formulate a strategy and then launch it. In many situations we can observe a "ready fire aim" kind of behavior. This means that the objective the STM is aiming at has been ill chosen, and the strategies have probably been formulated on the basis of assumption, rather than real data. The end result is failure!
Market Research Tips
The most important consideration for the STM is its customers! Demand for their products or services dropped for a reason; the STM must discover that reason, and understand it. Understanding it means, understanding why the customer’s needs/wants have changed; maybe changing due to the ultimate end user, or to competitors, or to technology.
These questions must all be answered by the STM. Before they can set meaningful objectives and or create strategies. Often the STM coaxially extends what it has done, and what has worked previously. It could be adding features, or performance enhancements to existing products and services, or even changing prices. Adopting a strategy without a complete understanding of the customer, the competition and the market is foolhardy.
How should the STM get this information as quickly and as cheaply as possible? There are two types of marketing research, Primary Research and Secondary Research. Primary research is the hardest and most costly to get, secondary research can be conducted on the Internet and the public library.
On-line libraries can provide large amounts of information at low cost. There is a useful book worth consulting, “Take the Cold out of Cold Calling” (Take the Cold Out of Cold Calling, Sam Richter, Beavers Pond Press, 2010) for tips and suggestions.
Researching an industry and its companies (the competition) can be done effectively by subscribing to a variety of on-line resources. Searches for financial data, and for a competitor’s strategic options, can be easily done by accessing their annual reports and 10Ks or 10Qs. These are regular reporting instruments required of any public company by the SEC.
A competitor’s activities and strategies can be discerned by searching available literature (articles, industry journals, etc) and by searching their ‘press releases’. Many companies will launch a plethora of press releases in a month, because it is cheap PR. Although the aforementioned techniques are not complete in themselves, they provide STMs valuable information.
These secondary techniques won’t provide complete data, but an STM will be much further ahead if it works these discovered data into its planning processes. Many STM managers will shoot from the hip or ‘fly blind’ when considering the next strategic move. Of course many assumptions (based on that old ‘common sense’) will also be used in making their decisions.
A series of simple questionnaires administered over the telephone can also be a good source of customer data. There is a fundamental mantra that all STMs (considering plans for growth) should accept; that is NEVER MAKE A DECISION OR DO ANYTHING STRATEGICALLY WITHOUT DATA. And they should continuously challenge and refine that data!
The Assumption Dilemma
Many multi-national companies (as well as STMs) make changes and take serious actions based on assumed data. It is part of the rigidity theme. Their actions are often extensions of what worked for them before and what they ‘think’ the status of their markets and customers are.
The danger in using assumptions in strategic planning, is that they have a reasonable probability of being wrong. In some situations an assumption is the best data that is available therefore planners must move forward and use that assumption. However the planners should take actions to make sure that they are using the best assumption possible.
Rigidities of thoughts and actions (previously discussed) almost forces the use of assumptions. It is part of an inherited process. Managers will use previously learned actions and gut feel to form an ‘assumption’ which then becomes part of their plan. The most important thing is not that a manager should, or should not, use an assumption; it is that they recognize that they ‘are’ using an assumption, and that the assumption is NOT real data.
The most important thing an STM manager could ask him/herself is “what assumptions are we using in deciding to take this action?” This rarely happens; managers quickly turn concepts into actions, ignoring the fact that they have made a ‘very big’ decision based on some unstated assumption.
Assumptions must be highlighted and tested to the best of a manager’s ability. However, most STM managers are in a big hurry to turn ‘concepts into action’, and then into a shippable product or service.
The old adage is never truer in this case; “haste makes waste” if the final product becomes un-shippable or unacceptable to the customer, then a great deal of time and money will have been wasted. Managers must also assure themselves that they don’t over-analyze their problems and fall into a “paralysis caused by analysis” situation.
What STMs don’t know, and the fact that they don’t know that they don’t know, is maybe the biggest contributor to failure in strategy execution.
STMs must develop flexibility enough to deal with the ambiguities that they will definitely confront. Their willingness to dive into making assumptions based on their previous experience is very dangerous.
Objectives
The first step in strategic planning for an STM is to set Objectives. STMs often get mixed up between setting goals and setting objectives. While goals are broad, or general in nature, objectives should be clear and concise. The STM should also set near and long-term goals for itself too.
Goals don’t have to be specific enough to act on, but should provide a future target, or a list of things "to be worked on." i.e. like when JFK set the goal to put a man on the moon by the end of the decade (end of 1969); not specific enough to be an objective but it set the country’s strategic direction.
Objectives however, need to be ‘SMART’—specific, measurable, action-oriented, realistic, and time specific and in congruence with the ‘goals’ set for the business. Specific objectives should be as detailed as possible. In order for the objectives to be measurable, they should be stated in terms of dollars, or in other measurable quantities.
Objectives should be clearly defined targets, usable when evaluating the performance of an operation. ‘Action oriented’ objectives state the actions required and who takes them. Objectives should be realistic, challenging, and with deadlines to ensure timeliness.
Often STMs (even if they set an objective) rarely visit that objective again. It often becomes a fixture, or is ignored, and thought of as "just one of these annoying things we had to do." Objectives should be re-visited at regular intervals, to check their validity, given changes in the business environment, or in the company, its finances, its staff, and its capabilities.
Failure to execute on a strategy is a major failing for over 70% of US companies. The reasons could be all or any of the things in the previous statement. However, these failures could be prevented if the company revisited its objectives regularly, and reset them in alignment with achievements; with finances, and with the staff and capabilities available.
Ram Charan (Execution: The Discipline of Getting Things Done, Larry Bossidy & Ram Charan, Random House) has stated that 80% of management in US companies are capable of formulating meaningful strategies for their organizations. However Charan feels that it is in executing that they fail, no disagreement here, but how does an STM ensure that its strategies are executed?
And as Charan and other people have stated, it is all about people; getting the right people and getting them armed with the right message; and getting them motivated is what it really is all about.
Strategies
What is a strategy? "A Strategy is the creation of a unique and valuable position, involving a different set of activities; activities that differ from your competitors" (What is Strategy – Michael E. Porter, Harvard Business Review, November – December, 1996)
In general, a strategy is a planned set of activities that when executed will lead an STM to achieving its Objectives, which may be financial and or market based. Therefore, the first step in the strategy formulation process is to set strategic objectives (as above).
A recent study by The Center for Public Communications, Inc. disclosed that in the 21st century, the single issue that will most likely cause the demise of emerging businesses will be their inability or failure to think strategically. Back to our rigidity model.
Let’s make it clear, an Objective is WHAT (SPECIFICALLY) WE ARE TRYING TO ACHIEVE; a Strategy is HOW WE ARE GOING TO ACHIEVE IT.
In formulating a strategy the STM should include considerations for:
- The business environment and technology
- Its Target Market, or market segment (niche)
- Its Competitors and their apparent strategies
- The stated Differential Advantage(s) over its competitors
In Porter’s (Competitive Strategy: Techniques for Analyzing Industries & Competitors, Michael E. Porter, 1998) classic publication he simplified the strategic development scheme by reducing it to the ‘three best strategies’. They are 1.- cost leadership, 2.- differentiation, and 3.- market segment focus (or niche marketing). Market segmentation is narrow in scope, while both cost-leadership and differentiation are relatively broad in scope.
Given the current market and business conditions, most STMs will find it difficult to implement a ‘cost-leadership’ strategy. They therefore should concentrate on either (or both) a differentiation and or a niche strategy.
The differentiation, best suited and easiest understood by an STM and its customers is one defined and created to provide a differentiation in ‘transferred value’.
Copyright 2008 – 2010 Henry Gregor, StrategicVisions. All Rights Reserved Worldwide.
