Too busy for strategy? New research shows your profits will suffer!
For many small and medium sized business, survival and profitability are the absolute priorities. While the CEO’s of small and medium size businesses (SMB’s) recognise that strategy is important, this year’s profitability is simply more critical than developing the company’s vision and mission right now.
Yet, research from PwC released in November 2016 indicates that a greater focus on business strategy is actually key to unlocking company profitability. While PwC’s research was focused specifically on family-owned businesses, it applies equally to all SMB’s. The research highlighted:
- Many of the issues facing family business come back to a lack of strategic planning – the ‘missing middle’ – namely having a strategic plan that links where the business is now to the long-term and where it could be. This results in many families not being able to turn early promise into sustainable success.
- While some firms are managing strategic planning well, many are caught up with the deluge of every day issues.
- Not only is (lack of strategy) limiting their ambition to expand and grow, and wider contribution to economies, but it could expose them to additional risk they have not effectively planned for.
Many SMB’s show this same “early promise” but never become all that they can be. Growth stagnates and the founder’s initial vision for the company is compromised by more immediate crises.
Clearly the executive teams at SMB’s need to spend more time thinking strategically if they are to reduce risk, maximise growth and increase profitability. However, research from Solo-E.com found that 86% of executive teams spend less than an hour a month discussing strategy. This suggests that leadership teams are spending more time fire-fighting than they are focusing on their long-term goals and profitability, reflecting the same findings as the PwC research
This crisis-focus also shows up in the statistics around company profitability. According to the National Federation of Independent Business (NFIB), over the lifetime of a business only 39% are profitable, with another 30% of businesses achieving break even, the other 30% lose money and 1% cannot say.
It appears that a change in mentality and approach to business is needed. Leadership at SMB’s need to recognise the link between strategy development and profitability. For example;
- Research by M3 Planning found that businesses using strategic plans are 12% more profitable than those that do not use it. The same study found that firms whose top management were committed to executing strategic planning saw an 80% increase in sales volume.
- Research by Capon and Hurlburt at Columbia University showed strategy improves performance by more than 1 percent return on capital.
Executive teams need to remind themselves on a regular basis how important strategic thinking and planning is to the company’s long-term profitability. If the company is to achieve its vision and long-term potential, then it cannot be constantly subject to the daily crises that will inevitably crop up. Executive teams must show leadership and force themselves to take time out for strategic planning. If not, the research shows that profits will suffer and the company is less likely to ever achieve its full potential.
This month's blog was kindly provided by Mike Kelly, a qualified Chartered Director, Managing Partner, Ridge Consulting and Founder, Impertion. Connect with Mike on LinkedIn.
The views expressed in the posts and comments of this blog do not necessarily reflect the views of the Institute of Directors in Ireland. They should be understood as the personal opinions of the author. The content of this blog is for information purposes only and the Institute of Directors in Ireland is not responsible for the accuracy of any of the information supplied.