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This research-paper deals with the use of strategic planning in new ventures and young small- and medium-sized enterprises (SMEs). It provides interesting insights into the topics of small business management and entrepreneurship and it particularly investigates characteristics of SMEs, the nature of strategic planning, the role of the entrepreneur in strategic processes, the elements of strategic planning in new ventures and young SMEs, and the benefits of and reasons against the application of strategic planning.
The Need EGR Strategic Planning
SMEs continue to play an increasingly important role in major economies around the globe. They employ more than half of all private-sector employees in the United States, are responsible for half of the gross domestic product (GDP), and generate between 60% and 80% of net new jobs per year. According to most definitions, small enterprises are firms that employ fewer than 100 employees, whereas medium-sized enterprises may employ up to 500 employees. Especially new business ventures, which are virtually always a subgroup of SMEs, have been a popular topic of academic research since Birch (1979) found that small firms create more new jobs than large firms.
Because SMEs are increasingly regarded as an important source of innovation, employment, and competition within industries, the search for factors that might facilitate the success of these businesses is growing (Carter, Stearns, Reynolds, & Miller, 1994). Such factors are of high importance not only to scientists, but also to politicians, entrepreneurs, and managers, because SMEs and particularly new ventures are threatened with high failure rates and low profit margins. Besides popular research topics and already proven influence factors such as human capital (e.g., level of education, experience, etc.), strategic planning can be considered one of these factors. Indeed, several empirical research studies reveal a link between strategic planning and corporate performance.
Due to an extensive application of strategic management techniques in large companies and a widely accepted notion that rational economic decision making should prevail in enterprises regardless of their size, practitioners and academics alike have recently called for a more substantial use of strategic planning in SMEs. Rue and Ibrahim (1998) even argue that strategic planning is one of the key issues for SMEs. Most strategic concepts and techniques are considered to be irrespective of company size. Nonetheless, SMEs normally dispose of a lower level of resources, have limited access to target markets, and possess an insufficiently developed administration. Thus, the application of formal strategic planning mechanisms is often missing, especially up to a certain “critical size” of the company (Karagozoglu & Lindell, 1998).
Ineffective deployment of strategic planning can even be considered the main reason for failure to achieve expected or projected performance in many firms. However, in real business, a major weakness that is often inherent in SME management is the absence of top management’s economic knowledge or its overorientation toward technical problem solving. Accordingly, strategic techniques are only rarely applied to SMEs. Formal plans and/or market-related result or cost controls are often only provided on an irregular basis. Additionally, a small number of individuals usually derive the respective techniques, which they develop intuitively rather than theoretically. Building on this, an important issue to address is the value of strategic planning for new ventures and young SMEs.
This research-paper of 21st Century Management therefore explores how and to what extent new ventures and young SMEs apply strategic planning within the scope of their business activities. Specifically, questions addressed include why these companies seem to plan less than large companies, whether strategic planning and corporate performance correlate with each other, and whether strategic planning is a function of increasing company size. The suggestion that enterprises that plan strategically are more successful than those that do not implies that, building on existing empirical initial evidence, new ventures and young SMEs reveal a lower degree of strategic planning (e.g., Gibson & Cassar, 2002), since large companies would generally be more successful than SMEs. However, this seems unlikely.
Strategy Formulation In SMEs
Characteristics of SMEs
Compared to large companies, SMEs tend to offer a more limited range of products on a more limited number of markets, and use market penetration and product development strategies rather than market development or diversification strategies. Moreover, since SMEs mainly operate in a single or a limited number of markets with a limited number of products or services, they usually cannot afford central service departments that are able to conduct complex market analyses and studies (Johnson & Scholes, 1997). In addition, they usually have fewer resources and more limited access to human and financial capital. As a result, the application of formal planning mechanisms is often missing.
Despite their relatively small market power, SMEs’ small size and flexibility permits them to specialize in narrow niches that are generally less interesting for larger enterprises due to the relatively small sales volumes and their high fixed costs. In addition, SMEs’ limited resources result in a concentration on a small product range where strong competitive advantages and specific problem-solving competencies can be built up, for instance with regard to qualitative market leadership. Higher decision flexibility and direct customer contacts are particularly helpful for the conversion of research and development (R&D) results into marketable innovations, although nondiversification risks remain in terms of overdependency on only a few products.
The Nature Of Strategic Planning
No single subject has dominated the attention of managers, consultants, and academic researchers as much as the subject of “corporate strategy.” Therefore, during the last 2 decades, the attribute “strategic” has almost become a buzzword. Particularly in the United States, an almost countless number of related articles have been published.
From a corporate perspective, strategy can be defined as an approach utilized to reach the company’s goals in order to be successful on a long-term basis. Corporate strategy is an area within management science that is concerned with the general direction and long-term policy of the business in contrast to short-term tactics and day-to-day business operations. Strategic management thus means management in pursuit of and on the basis of a corporate strategy. The discipline of strategic management formed in the 1980s is based on advancements in the field of strategic planning. Strategic management mainly deals with matching the activities of the business to the resources as well as to the environment in order to maximize the opportunities and minimize the threats. One of the most important approaches since these days is the so-called SWOT (strengths, weaknesses, opportunities, and threats) analysis, by which a firm can assess its market and the environmental conditions impacting on its strategic plan.
The most important element of strategic management is strategic planning. In general, strategic planning is regarded as long-term oriented (at least 3 years), directed toward future yield potentials, substantial and holistic in nature, and predominantly associated with the highest management level determining the vision, mission, and culture of the enterprise. Strategic planning is the attempt to prepare for all eventualities by abstraction and thus to account for the complexity and the dynamics of the environment. This entails the need to build alternative future scenarios and configurations. Although no one can foresee the future, it is possible to prepare for the future and/or alternative futures and align the enterprise accordingly.
In contrast to strategic management, strategic planning is not about visionary future concepts, but rather about extrapolating present development tendencies into the future. Hence, it does not provide visions but, more specifically, guidelines and programs for the achievement of specific goals. Consequently, strategic planning specifies the basic conditions and the scope of future business activities, and thereby is a fundamental element for strategic management, which, in turn, is responsible for goals and visions.
Bracker and Pearson (1986) have developed a scheme that divides planning in SMEs into four categories:
- Unstructured planning
- Intuitive planning
- Formal operative (short-term) planning
- Formal strategic (long-term) planning
In the context of new ventures and young SMEs, strategic planning is of particular interest since strategies for these SMEs have to be developed in a highly emergent way (Mintzberg, 1994), reflecting their fast-changing requirements.
The Role of the Entrepreneur
Management of SMEs and new ventures is always an integral part of entrepreneurship. The word “entrepreneur-ship” is derived from the French “entreprendre,” which can be translated as “to undertake” or “to take in one’s own hands” (Schaper & Volery, 2004). The real entrepreneurial work is about bringing new ideas into actual ventures that exploit market opportunities by better serving the customers’ needs.
The entrepreneur does not necessarily have to be the inventor of the new product, service, or business—but he or she is the one introducing this innovation to the market place. Entrepreneurs are therefore people who take something (e.g., an opportunity or a business venture) into their own hands, at their own risk.
In most SMEs, usually only top-level management (i.e., the entrepreneur him- or herself) is responsible for the development and deployment of strategic plans. Hence, the role of entrepreneur is always critical for the whole strategic process. Next to the entrepreneur, who is legitimized to do so via ownership, external (employed) managers, such as a CEO, may lead such an enterprise.
Due to the size of the enterprise, the entrepreneur is most deeply rooted in day-to-day business operations and thus is also involved in all levels of decision making, some of which occur simultaneously. Accordingly, personal goals, characteristics, and the entrepreneur’s strategic awareness have an important influence on the development of the enterprise, and often the rate of strategic planning sophistication is a function of the entrepreneur’s previous experience.
Besides, the process of strategic decision making in SMEs is often not only based on experience, but also on intuition or guessing. Therefore, strategic decisions mostly reflect the subjective orientations and attitudes of the entrepreneur. The role of the entrepreneur and his or her attitude toward strategic issues are thus often critical for the implementation of planning measures. Planning is an activity without direct returns, which is hard to justify (psychologically), either if customers are flocking to the company or if they are hard to come by and marketing and sales activities appear more important.
Although business schools regularly stress the relationship between strategic planning and corporate performance, only approximately 20% of all college graduates obtain their degrees in management science. Academic research shows that education has a significant influence on strategic activities; the probability to think and act strategically grows with the level of education. Especially for business graduates, the probability of having written a business plan is much higher than for their nonbusiness counterparts.
However, since many entrepreneurs have not graduated from college or have obtained their degrees in nonbusiness areas, it follows that many have limited knowledge of the strategic planning discipline and therefore limited managerial qualifications. Moreover, entrepreneurs have different aversions against strategic planning and the application of formal methods such as strategic planning.
Reasons Against Strategic Planning in SMEs
In real-life business, preparation mostly comes through strategic planning. Many SME owners and managers routinely plan their daily operations, but do not believe that strategic planning applies to them or are not sure if strategic planning will improve corporate performance.
Even though most authors agree that strategic planning can be very useful for SMEs, few of these firms utilize this and instead follow the strategy of “muddling through” (Porter 1985). The reason for this is that many decision makers in SMEs are still convinced that “real entrepreneurs don’t plan” (Posner, 1985). An entrepreneur who has done fairly well so far without strategic planning might also simply be reluctant to change.
Academic research has derived several factors that inhibit the use of formal planning in SMEs. From the entrepreneur’s perspective, the major objections against the use of strategic processes in SMEs are that
- strategic measures and techniques constrain flexibility and the ability for improvisation;
- it makes more sense to use the limited time resources for operational or sales activities or research and development (R&D) than for strategy-formulation processes; and
- strategic management is too bureaucratic.
The true reasons behind such aversions are often deficient know-how, overestimation of one’s own capabilities, rejection of external help, thinking in traditions, or fear of far-reaching changes.
Nonetheless, especially in times of increasing dynamics and uncertainty, it is vital to stay informed about corporate goals and their attainment on a regular basis. The strategy-formulation process therefore should be regarded as a future investment. Although the majority of the well-known strategy concepts mostly originating in the 1980s have been developed for big companies, which generally display a higher awareness for existing problems and can hence allocate more resources to this issue, some of the strategic concepts and techniques also seem to be suitable for implementation in SMEs. One of the main benefits of strategic planning lies in the predictability of possible future scenarios and variations. Besides, no business is too small to require a sound strategy, and few strategies are so simple that they do not have to be developed into some form of a strategic plan.
Strategic Planning For Small Enterprises
Strategic Planning in New Ventures
In the recent years, governmental, nongovernmental, and educational institutions have dedicated a large effort toward the promotion and training of strategic thinking as well as actual strategic planning activities for entrepreneurship. The rationale behind this is that every business, regardless of its size, should have some form of strategic plan. Founders of new ventures always follow some sort of strategy to reach their goals, although these strategies are not always highly rational or explicit. In the case of SMEs, however, this strategy may be represented by the manager’s general thoughts. Only with increasing size, the strategic plan becomes more formal and elaborate. This formal document is called a business plan.
In general, a business plan is the written form of the firm’s overall strategic plan, which aims to put in place tools, techniques, and processes that identify and achieve the business’s long-term goals. A business plan addresses key questions about the vision an enterprise strives to achieve and the operational details about how it aims to get there. It can thus be defined as “a written document that describes the current state and the presupposed future of an organization” (Honig & Karlsson, 2004, p. 29). In other words, a business plan collects and summarizes all information that is relevant for the business. It is accordingly some form of the entrepreneur’s “game plan.” A business plan legitimizes the new venture proposal and serves furthermore as a means of communication with external stakeholders, especially potential investors. The business plan can therefore be regarded as both the first step in the strategic planning process as well as its overall documentation.
A business plan covers the long-term focus of the business as well as operational issues such as marketing, operations, and financing. The major elements of a typical business plan include an executive summary, the firm’s background including detailed relevant information about the founding persons, the firm’s resources, the product, marketing details, operational arrangements, and financial projections as well as a timetable for implementation (Schaper & Volery, 2004).
Surprisingly, so far only few academic researchers have dealt explicitly with the business plans of SMEs. A business plan is usually regarded as a rational activity that assists the entrepreneur to make larger profits. It was found that contents of business plans and their implementation can play an important role in effective planning. It is a commonly accepted assumption that business plans are made by rational economic actors.
Writing a formal business plan is widely regarded as one of the most important aspects of strategic planning. The existence of a business plan is widely regarded as a valid indicator for the firm’s attitude toward strategic planning. The underlying assumption is that a written business plan represents good planning (Heriot & Campbell, 2004).
Formal written plans are widely considered better than informal, unwritten plans because they foster critical thinking, group decision making, and internal as well as external communication, and furthermore serve as a control mechanism for possible course corrections (Baker, Addams, & Davis, 1993). Start-ups with business plans seem to have better access to external money (from banks, venture capitalist companies, etc.), and are therefore more likely to actually go into business. Particularly for small businesses, the development of a business plan is widely called for in order to enable financing for internal and external communication and as a control mechanism.
Yet in real life, many businesses—sometimes more than half of the interviewed companies—lack a solid business plan and the majority write one only when external funding is needed. This refers to the widespread assumption of banks, business angels, and venture capitalists that business plans are necessary for success. Nevertheless, the existence of a business plan prior to new-venture founding contributes positively to corporate performance (i.e., profitability) as well as to the survival of the companies (Kraus & Schwarz, 2007).
Strategic Planning In Young SMEs
As conventional wisdom and empirical evidence seem to ascertain, strategic planning is a concept that marks out successful companies. Strategic planning may assist entrepreneurs in recognizing the breadth and complexity of their business. The level of uncertainty is reduced by providing a better understanding of the circumstances of its business, and hence to better prepare for the future. Accordingly, strategic planning helps to cope with the insecurities of businesses, and thus brings a beneficial value for the future, even above the sole acquisition of capital. It saves time and enhances management professionalism after start up.
Furthermore, it promotes long-term thinking, reduces the focus on operational details, and provides a structure for the identification and evaluation of strategic alternatives.
For these reasons, several authors found a positive statistical relationship for corporate performance and ongoing strategic planning. Especially long-term formal strategic planning has been shown to have a positive relationship to performance (e.g., Kraus, Harms, & Schwarz, 2006). The pure process of (formal) planning itself already seems to have a positive effect in that it leads to a better understanding of the business and to a broader range of strategic alternatives. Formal strategic planning is elementary for long-term growth and development of small businesses.
Further empirical studies also demonstrate that formal strategic planning can be beneficial for survival and growth of small enterprises. For example, in a longitudinal analysis Sexton and Van Auken (1985) found that the survival rates of SMEs conducting formal strategic planning are higher. Lyles, Baird, Orris, and Kuratko (1993) state that a more advanced and more detailed strategic planning results in a more substantial corporate growth.
Elements of Strategic Planning in New Ventures and Young SMEs
The following paragraphs describe the most important elements of strategic planning with special consideration of their relevance for new ventures and young SMEs.
Visionary Strategy Conception
Strategy is based on the development of a vision of how the future will unfold and the company’s role in it. This necessarily includes interactions between actors and environmental conditions as well as the change resulting from it. The vision is to help the organization develop a sustainable and advantageous position in competition with other actors under possibly radically changing conditions.
Goals and Objectives
Strategic management literature recommends that a company set goals or objectives, which allow for later evaluation of performance. Such goals are derived from the superordinate vision, but should be more grounded in reality and based on reasonable estimations achieved through data collection of similar businesses and competitors. Of course, setting the corporate goals is the responsibility of top management, but middle management should also be included in setting them at functional levels. Especially in the case of new ventures, the entrepreneur will most likely be responsible for both: the overall corporate goals as well as the functional goals, since there is not yet a middle management. The goals and the strategies to achieve them should be regularly controlled and updated or adapted, if necessary (Moyer, 1982).
Strategic planning always includes an evaluation of the firm’s distinctive competencies, i.e., the particular and hardly imitable skills and strengths. This might be a unique combination of resources, such as innovations, products, production facilities, or patents, but may also include a company’s personnel, financial situation, or product development record (Moyer, 1982). If a core competency yields a long-term advantage to the company, it can bring the firm a sustainable competitive advantage.
In the context of new ventures or young SMEs, the core competence is often the innovation upon which the business model is grounded. This might, for example, be a truly innovative, novel product or service idea (in the Schumpeterian sense), or a recombination of already existing elements that are put together in a way that provides more customer service. The core competencies of a firm can be discovered by the use of the SWOT analysis (see the subsequent section in this research-paper “Strategic Techniques”).
Although planning often tends to center around yearly budgeting, real strategic planning is likely to be longer term. Usually, a time horizon of about 3 years is used in larger firm strategic planning (Rue & Ibrahim, 1998).
SMEs are frequently said to be more flexible than larger ones, and they often do not yet possess the necessary experience and knowledge to plan ahead for such a long time. The question is how long the optimal time horizon of strategic planning should be in small firms (Moyer, 1982). Empirical evidence shows that the average time frame for strategic planning in young SMEs is about 18 months (Kraus, Harms, & Schwarz, 2006), and thus only half as long as most strategy textbooks propose. Accordingly, it can be concluded that long-term strategic planning in new ventures and young SMEs is simply shorter than in large, established enterprises.
Formal Strategic Planning
We have already highlighted the great importance of formal strategic planning. A formal strategic plan implies a deliberate means to systematically include factors and techniques in order to achieve specified goals. Formal strategic planning can lead to a better understanding of the business and to the discovery of a broader range of strategic alternatives. Further, firms with a formal strategic planning approach are more likely to give more active consideration to potential barriers from the outside. A key component of strategic planning in small and young firms is the business plan (see the previous section in this research-paper, “Strategic Planning in New Ventures”).
Informal planning, on the other hand, has only limited value, since only a few planning areas can be dealt with at the same time, whereas a formal plan allows for a synopsis of multiple planning areas. Thus, the entrepreneur is able to see connections that otherwise would have gone unnoticed.
It can be concluded that firms that apply formal strategic planning also attach great importance to the quality of the strategic decision-making processes and that decision makers develop larger knowledge of the strategic issues through the process of planning. Nevertheless, in real business life, most independently owned SMEs have a less structured approach to strategic planning deployment, and very often only plan intuitively and informally.
Strategic techniques do not make strategy, nor do they implement strategy. Rather, they are tools that help align strategic thinking. They can be used for the identification of a firm’s goals and strategies and for the presentation of complex issues, and can therefore serve as an important communication device. Among the techniques that might be able to be used in SMEs are the analysis of financial data, and the SWOT analysis (the inclusion of a company’s own strengths/weaknesses in comparison to that of the competition as well as the chances/risks in the market).
One of the most important elements of the SWOT analysis is the environmental analysis, which includes changes in the economic, social, cultural, political, or business environment that might affect the firm’s business. The other major element of the SWOT analysis is the customer analysis, since customers are the key to enterprise success. Customer analysis includes questions such as where they prefer to buy the products, what attributes the product should have, and how markets could be segmented (Moyer, 1982).
Other well-known strategic techniques, such as benchmarking, GAP analysis, or Balanced Scorecard, which could also be used in smaller enterprises, are often unfamiliar to entrepreneurs, especially when they do not have an educational background in management science. Also techniques like portfolio (such as the Boston Consulting Group or the McKinsey/General Electric matrices) or product life cycle analysis are usually more widespread in larger firms, since most small or young firms simply do not possess multiple products and their product is not in an advanced phase of its life cycle.
The use of several strategic techniques are beneficial for the strategic planning process in new ventures and SMEs, as empirical evidence suggests. Nonetheless, we must keep in mind that “how well” is often not the same as “how much”; it depends on the right choice of strategic techniques, not on the pure number.
The implementation of a strategy and of the measures required to attain it must be measured in order to provide feedback to the employees and managers on their situation.
Even the best plan might not produce the desired results due to various unforeseen circumstances that are internal or external to the enterprise. Therefore, measuring actual against planned performance regularly and taking remedial action on factors causing unfavorable deviations from the plan are important to maximize the results anticipated through strategic planning. This is needed when current developments diverge from the predicted trends that were underlying the previous plans.
Control enables long-term plans to be adjusted in a flexible way. Frequent control helps to change the plans and respond to the new circumstances quickly and thus in a cost-efficient way. Control not only helps detect irregularities, but also helps companies handle complex situations, cope with uncertainty, and identify opportunities.
Do SMEs Plan Strategically?
Existing literature gives adequate evidence that planning in SMEs does not always take place in a highly sophisticated way. The actual process of decision making often deviates substantially from the ideal picture of rationality. Planning in SMEs seems to be rather unstructured, sporadic, incremental, and often informal.
However, it remains unclear whether SMEs do not plan strategically at all or whether they simply do not plan in a formal way (i.e., intuitively). The latter (the entrepreneur’s ideas) would be the minimal approach to planning. Along these lines, it could be that not only strategic planning itself, but also the quality of the planning process play an important role. Many small-business entrepreneurs are successful without explicitly practicing strategic planning (Pleitner, 1989). It therefore seems reasonable to assume that each form of planning, whether it is conscious or unconscious, formal or informal, can also affect entrepreneurial success.
Building on these notions, it can be assumed that people in most SMEs do at least think strategically. A conscious or formal strategic process, however, mostly takes place in the head of a very small number of employees. Due to the well-accepted view that strategies can limit an SME’s scope of activity too much, thereby reducing its flexibility, many SMEs are still lacking written strategic plans. Strategic awareness and the involvement of the entrepreneur could offset the lack of formal strategic planning as an output of strategic management. The degree of the entrepreneur’s strategic orientation thus seems to be a key factor for the strategic focus of the enterprise.
Furthermore, small and large enterprises differ considerably in the size and type of resources. It thus appears doubtful to develop “standard” strategies and techniques that are equally effective in big companies and SMEs. As the use of strategic planning also seems to be worthwhile in SMEs, the respective techniques must be aligned with the personnel as well as the cultural, organizational, and financial conditions of the specific enterprise in order to be successful.
The notion that there are differences in strategic goals between small and larger enterprises entails the need to also differentiate between the goals of different small enterprises. Generally speaking, goals depend on the situation of enterprises and their market niches. Overall, it is plausible to assume that the problems of different SME types will vary. Likewise, a distinction between types of SMEs is clearly needed at least in terms of age and market situation. While public interest mainly concentrates on SMEs as potential generators of growth, only a subset of these enterprises will live up to these expectations. Thus, the procedural instructions and techniques for these enterprises will differ accordingly and must be tailored to the individual case. This implies that there will also be differences in terms of necessary and/or suitable techniques of strategic planning and the resulting output. As a result, the measurable economic performance of an enterprise and thus the correlation between corporate performance and the use of planning techniques will also depend on the particular type of enterprise. For example, considerable strategic differences exist between small, mature enterprises in a stable and specialized niche on the one hand and young, growth-oriented enterprises on the other hand. While the former aim at securing their market position, further developing their technology, and closely satisfying their customers’ needs in order to increase profits, young, growth-oriented enterprises will rather—after testing the functional capacity of their business model and their niche—shift their focus toward extending the market niche and their respective market share as soon as possible. This situation requires tools and techniques that focus much more on learning and sense making for small enterprises than they do for large ones.
It seems, therefore, that the central question is not whether strategic planning in SMEs is fruitful, but for which groups of SMEs and under which circumstances it is worthwhile. Enterprise characteristics differ significantly between young, small ventures and established, large companies, and so do the strategic imperatives that can be derived for each enterprise type.
Benefits Of Strategic Planning
While some authors (e.g., Bhidé, 2000) argue that planning offers little advantage to small businesses, it is argued here that formal strategic planning can enhance management skills. The pure process of developing a business plan causes management to actively deal with the enterprise’s goals, strategies, and plans. In doing so, management attains a larger knowledge of possible alternatives and its environment. In this vein, it can be argued that every enterprise, regardless of size, needs an effective, comprehensive business plan, as it enables its decision makers to engage with the reality of the business world rather than the common dream world. Management thus regards the business plan as the first step toward success. Moreover, formal written plans are regarded as more effective since the formulation process itself promotes critical thinking and group decisions (Baker, Addams, & Davis, 1993).
Nevertheless, strategic planning may be a substantial factor for small business performance. Even so, it is worth mentioning that the best business plan is only of limited use if it is not implemented. The importance of the business plan as a facilitating tool for future entrepreneurs must be emphasized. Additionally, the process of strategic planning should not be a one-off, but moreover a continuous action including the adaptation of former goals and strategies within a changing environment, which is valid especially for young and small businesses. Therefore, a business plan should not be limited to the start up of an enterprise, but instead also used as a continuous working document for ongoing strategic planning during all times of enterprise development and growth.
Despite the fact that small and large enterprises differ considerably in size and type of resources, we can assume that decision makers of SMEs do apply planning, although in many cases they do so rather intuitively and/or informally. Moreover, businesses, independently from their size, seem to be capable of executing some of the most important strategic techniques (such as the SWOT analysis). Since the link between the use of these strategic techniques and corporate performance should prevail in SMEs, it is essential to foster a respective awareness in the enterprise. Since SMEs are rarely “small-sized big enterprises,” the existing concepts and techniques have to be adapted accordingly. It does not appear to make sense to develop “standard” strategies and techniques that are equally effective in big companies and SMEs. As the use of strategic planning also seems to be worthwhile in SMEs, the respective techniques must be aligned with the personnel as well as the cultural, organizational, and financial conditions of the specific enterprise.
An analysis of extant academic literature on the topic indicates that strategic planning in SMEs is subject to unique characteristics and influences. Although a high relevance of strategic planning in the context of SME management does exist, its extent and design differ from larger (multiproduct, multidivisional) companies. Accordingly, research needs to devote more time to the analysis of the idiosyncrasies of this corporate sector to advance our understanding of strategic planning in SMEs and derive valuable recommendations for research and practice.
Overall, we can state that strategic planning seems beneficial not only for large enterprises, but also for the performance of new ventures and SMEs. Formal planning in particular can be considered as being particularly useful if knowledge about the environment is scarce such as at the beginning of the life of an enterprise, in a fast-changing environment, or when management is “new” to a market,
technology, product, or business model. If the environment is well known and stable, informal plans might well suffice. However, if an organization becomes larger, its complexity and environmental exposure require more formal planning. Different organizational characteristics between SMEs, new ventures, and young enterprises, and their relation to planning implementation and entrepreneurial performance need to be explicitly considered in this endeavor.
The implementation of formalized strategic planning can nevertheless be expected to be favorable independent of company size and level of development, although in practice a positive relationship between increasing company size and the implementation of strategic planning techniques could be measured. This finding is likely to be correlated with—if not caused by—the increasing need for uncertainty reduction about the enterprise’s role in its environment, an increasing attention to similar details, and an ability to cope with matters in a “mechanistic” fashion. By the time an enterprise has grown too big for one person to manage, management by instinct alone will not be sufficient, and the necessity for strategic planning arises. In that respect, scientific literature provides evidence that the use of strategic planning methods and techniques is dependent on increasing company size, and thus that SMEs do seem to plan less than established larger enterprises. Future research should therefore address these restrictions and attempt to gain deeper insight into type, extent, and alignment of strategic management techniques in SMEs and the resulting consequences for corporate performance.
Over the lifetime of an enterprise, formal strategic planning is relatively high at the beginning when the enterprise is still small, and it is again high when the organization has reached a certain complexity due to its increase in size and number of tasks undertaken. During intermediate levels of organizational size and age, formal planning might be less required because the enterprise is usually established in a relatively certain business context, where there is a certain level of task repetition and the organization has not yet reached high levels of complexity. Environmental characteristics, which can be split into the subfactors of dynamics (of environmental change) and complexity (of environmental forces), modulate the level of formal planning requirements.
The danger of formal planning conversely is that it might make strategy and management overly rigid when change is needed. On the other hand, informal methods of planning favor unconscious shifts of strategy, which may endanger attainment of goals when a stable, strict course is required.
Of course, larger enterprises can better justify the planning costs, but strategic planning does seem to make sense in smaller enterprises, too. So, what should practitioners do with this information? First, owner-managers who already know strategic concepts from their undergraduate business studies or MBA programs have a clear advantage. But because of the many flexible further education programs that exist today, either in form of part-time or distance learning university education or even textbooks, there is not much “wisdom” left in the concepts of strategic management, although the fact remains that most of the literature has been written for large(r) enterprises. These concepts accordingly need to be adapted for the needs of smaller ones.
Accordingly, implications for scientists, educators, and consultants include increasing the awareness and sensitivity for formal strategic planning in new ventures and young SMEs. The staff of governmental, nongovernmental, and academic institutions should be more strongly encouraged to train entrepreneurs in preparing business plans such as through workshops or business plan competitions. Effective strategic planning must be grasped and “learned” by all decision makers within the company in order to be effective.
Although a business plan can never guarantee success (Crawford-Lucas, 1992), its preparation, existence, and application can at least be an important help in avoiding failure of small businesses, which can in turn be fruitful for the respective economy. This research-paper thus contributes to work on small businesses since it shows that planning does make sense in small businesses. In parallel, this study also holds some interesting implications for practitioners. First, it shows that entrepreneurs should thoroughly write business plans before starting their businesses, even if they are keen to start as soon as possible. By developing a business plan in advance, entrepreneurs can discover possible risks or deficits of their business and thus reduce the likelihood of failure and increase the likelihood for financial success. In short, if you want to be more successful, obtain more knowledge of the strategic planning process.
Although many SMEs and young ventures engage in at least some degree of strategic planning, they should ensure that their written business plans are constantly being evaluated and corrections undertaken. In order to ensure maximum impact, open communication with all managers and employees is mandatory.
Baker, Addams, and Davis (1993) have further developed a four-phase approach for effective strategic planning:
- Development of a strategic plan with a long-time horizon (typically 3 years) that includes the firm’s vision, mission, core competencies as well as a SWOT analysis.
- Preparation of a written business plan for top-management purposes.
- Communication and implementation of the business plan.
- Constant formal review (control), at least quarterly, including necessary corrections and adaptations when environmental circumstances change. (Strategic planning is always a dynamic process; it implies change.)
Following these phases can help increase organizational effectiveness. In the worst-case scenario, strategic planning in new ventures and SMEs would result in the enterprise knowing where it would stand without planning.
- Baker, W. H., Addams, H. L., & Davis, B. (1993). Business planning in successful small firms. Long Range Planning, 26, 82-88.
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