The most commonly accepted definition of a small business firm is one that employs fewer than 500 people and that generates sales of less than $20 million annually. According to the U.S. Small Business Administration, “A small business is one which is independently owned and operated, and which is not dominant in its field of operation.”
Although there is considerable overlap between what is meant by the terms small business and entrepreneurship. The concepts are different. The small-business firm is independently owned and operated, not dominant in its field, and doesn’t engage in innovative practices.
The entrepreneurial venture, in contrast, is any business whose primary goals are profitability and growth and that can be characterized by innovative practices. The basic difference between the small business firm and the entrepreneurial venture, therefore, lies not in the type of goods or services provided, but in their fundamental views on growth and innovation. Thus, according to Donald Sexton, an authority on entrepreneurship, strategic planning is more likely to be an integral part of an entrepreneurial venture than of the typical small-business firm:
“Most firms start with just a single product.
Those oriented toward growth immediately start looking for another one. It’s that planning approach that separates the entrepreneur from the small-business owner.”
B.The Entrepreneur as a Strategic Manager
Often defined as a person who organizes and manages a business undertaking and who assumes risk for the sake of a profit, the entrepreneur is the ultimate strategic manager. He or she makes all the strategic and operational decisions. All three levels of strategy – corporate, business, and functional – are the concerns of the founder and owner-manager of the company. As one entrepreneur puts it, “Entrepreneurs are strategic planners without realizing it.”
Use of Strategic Management Research shows that strategic planning is strongly related to small-business financial performance. Nevertheless, many small companies still do not utilize the process. Four reasons usually are cited for the apparent lack of strategic planning by many small-business firms.
1. Not enough time. Day-to-day operating problems take up the time necessary for long-term planning. It’s relative easy to justify avoiding strategic planning on the basis of day-to-day crisis management. Some will ask, “How can I be expected to do strategic planning when I don’t know if I’m going to be in business next week?
2.Unfamiliarity with strategic planning. The small-business CEO may be unaware of strategic or view it as irrelevant. Planning may be viewed as a straitjacket that limits flexibility.
3.Lack of skills. Small-business managers often lack the skills necessary to begin strategic planning and don’t have or want to spend the money necessary to bring in consultants. Future uncertainty may be used to justify a lack of planning. One entrepreneur admits, “Deep down, I know I should plan. But I don’t know what to do. I’m the leader but I don’t know how to lead the planning process”
4.Lack of trust and openness. Many small-business owner-managers are very sensitive about the business’s key information and unwilling to share strategic planning with employees or outsiders. For this reason also, board of directors often are composed only of close friends and relatives of the owner-manager people unlikely to provide an objective viewpoint or professional advice.
Value of Strategic Management There is some evidence, however that an increasing number of small businesses are introducing strategic management very early in their existence. A 1990 survey by the national accounting and consulting firm of BDO Seidman found that 81% of firms 1-10 years old had strategic plans, whereas only 67% of companies 11-20 years old had such plans. Herb Goldstein, a partner with BDO Seidman, commented that older entrepreneur were more likely to “manage by the set of their pants.”Of those firms with strategic plan 89% indicated that the plan had been effective. Reasons given for its effectiveness were that it had specific goals (64%), gave staff unified vision (25%), and set up a time frame for achievements (11%). Reasons given for an ineffective strategic plan were that it was too vague (43%), lacked a time frame for goals (29%), did not identify goals (17%), and lacked staff input (11%).
Degree of formality
Researchers generally conclude that the strategic planning process should be far less formal in small companies than it is in large corporations. Some studies have even found that too formal a process may actually hurt performance. A heavy emphasis on structured, written plans may be dysfunctional to small entrepreneurial firms because it reduces the flexibility that is crucial to their success. The process of strategic planning, not the plan itself, is probably the key to improving business performance. The observations suggest that an entrepreneurial venture begins in Henry Mintsberg’s entrepreneurial mode of strategy formulation (see Chapter 2) and moves toward the planning mode as the company becomes established and the entrepreneur wants its growth to continue. However, if the entrepreneur choose stability over growth, the venture moves toward the adaptive mode common to many small business.
Usefulness of Strategic Management Model
The descriptive model of strategic management presented in Fig. 1.2 and which prefaces each chapter in the book – also is relevant to entrepreneurial ventures and small businesses. This basic model holds for both an established small company and a new entrepreneurial venture. AS the research mentioned earlier concluded, small and developing companies increase their chances of success if they make a serious attempt to work through the strategic issues embedded in the strategic management model. The key is to focus on what’s important: the set of managerial decisions and actions that determine the long-run performance of the company. The list of informal questions presented in Table 13.1 may be more useful to a small company than the more formal approach used by large corporations.
Usefulness of Strategic Decision-making Process
One way to make strategic management model action-oriented is to follow the strategic decision-making process presented in Fig. 2.3. Those eight steps are just as appropriate for small companies as they are for large corporations. Unfortunately, the process doesn’t fit new entrepreneurial ventures. These companies must develop new missions, objectives, strategies, and policies by comparing their external opportunities and threats to their potential strengths and weaknesses. Consequently as shown in Fig. 13.1, we propose a modified version of the strategic decision making process that better suits the new entrepreneurial business. The proposed strategic decision-making process for new ventures comprises the following eight interrelated steps:
1. Develop a basic business idea involving a product and/or service having target customers and/or markets. The idea can be based on a person’s experience or generated in a moment of creative insight. For example, F.X. Cretzmeyer conceived the idea of the beverage cooler long before it became feasible as a product.
2.Scan the external environment to locate strategic factors in the societal and task environments that pose opportunities and threats. Scanning should focus particularly on market potential and resource accessibility.
3.Scan the internal strategic factors relevant to the new business. The entrepreneur should consider objectively personal assets, areas of expertise, abilities, and experience – all in terms of the organizational needs of the new venture.
4.Analyze the strategic factors in light with the current situation. The entrepreneur must evaluate the ventures potential strengths and weaknesses in light of opportunities and threats.
5.Decide to proceed or stop by determining whether the basic business idea still appears to be a feasible business opportunity. If it is, continue the process. Otherwise, don’t develop the idea further unless the strategic factors change.
6.Generate a business plan specifying how to transform the idea into reality. Table 13.2 lists the suggested contents of a strategic business plan. The proposed venture’s mission, objectives, strategies, policies, likely board of directors (if a corporation), and key managers should be developed. Crucial internal factors should be specified and performance projections generated. (The strategic audit (in Chapter 2, pages 48-55) can be used to develop a strategic business plan. The audit’s sections and subsections along with the questions within them provide a useful framework for developing a plan.) The business plan serves as a vehicle through which financial support is obtained from potential investors and creditors. Starting a business without a business plan is the quickest way to kill a new venture. For example, one study of clothing retailers showed that 80% of the successful stores had written a business plan, whereas 65% of the failed businesses had not.
7.Implement the business plan with action plans and procedures.
8.Evaluate the implemented business plan by comparing actual performance to projected performance. This step leads to Step 1 (b) of the strategic decision making process shown in Fig. 2.3 if actual results are such less or much greater than the anticipated results, the entrepreneur may need to reconsider the company’s current mission, objectives, strategies, policies, and programs and make changes to the original business plan.