A small business strategy answers three questions: where, why and how. This guide has the steps, a hypothetical business strategy example and common mistakes.
In A stagnant business becomes a marsh, I wrote that a business is in motion when its owner knows where it is going, why it is going there, and how, and works to get there.
Creating a business strategy means answering those same three questions, in a form you can make decisions with.
This post goes through how to create a strategy step by step, and it has an example too. The three-question framework is my own. The rest I compiled from the writing of authorities on strategy and from the guides of business support agencies. The sources are at the end of the post.
What strategy is not
Before the three questions, set aside three things that are often mistaken for strategy.
A financial goal is not a strategy. Richard Rumelt, the author of Good Strategy Bad Strategy, tells of a manager whose plan was this: 20 percent revenue growth every year and a 20 percent profit margin. When Rumelt asked what was going to make that possible, the manager answered with motivational phrases. According to Rumelt, a goal for growth and profit is only what you want, not a strategy. Strategy means removing the obstacles that stand between where you are today and what you want.
A list of tasks is not a strategy. In a conversation with Harvard Business Review, Roger Martin separates a plan from a strategy. A plan is about things that are in your control, such as hiring and renting. A strategy is a few coordinated decisions about where to operate and how to win the customer. Because the final decision is the customer's, its result can't be guaranteed.
Vision, mission and values alone are not a strategy. Rumelt says many organizations fill in a ready-made template, and the result is sentences that only repeat the obvious. Michael Porter, a professor at Harvard Business School, also treats these as separate from strategy. According to him, strategy is the set of long-term choices that sets a company apart from its competitors.
The first question: where are you going?
The answer to this question is your destination, meaning your long-term goal: where you want to be a few years from now.
"We want to make money" is not a destination. We all want to make money. You can make money buying and selling gold, or in property, or in a recycling plant. That sentence doesn't tell you which one to choose.
"We want to grow" is not a destination either. The Australian government's guide for businesses says a good goal has five qualities: it is specific, it is measurable, it is achievable, it is relevant to your business, and it has a deadline. Its example is a gardening business that turns "increase income" into this: four new regular customers in two months, without losing the current customers. That example is short-term, but a destination several years away needs the same five qualities.
As for the time span, the Business Development Bank of Canada (BDC) says the planning horizon used to be three to five years, and two to three years is now more common.
The second question: why do you want to go there?
I think this is the most important question. "Why" is the reason for moving. If you have no reason to move, you don't move.
The answer to "why" says what your business exists for, what it does, and for whom. This is what is called a "mission statement". BDC recommends writing it in one sentence, two at most. Its use is that it makes the boundary of your work clear and stops you from wanting to serve everyone.
In my view, a business that doesn't know what it is and who it is can neither market nor sell, and it ends up in crisis.
I said above that a mission alone is not a strategy. "Why" sets the boundary of your choices, but it is not a choice itself. The choices come in the third question.
The third question: how will you get there?
Most of the strategy takes shape in this question, because its answer is a number of choices.
- What is the most important obstacle in your way? Rumelt says a problem is worth spending energy on when it is both very important and really solvable.
- Which customers do you serve, and which of their needs do you meet? In my view, a small business can have several lines of work, as long as they are decided in advance, limited, and don't change every day.
- What will you not do? Porter says strategy requires you to decide deliberately what not to do. According to him, the worst mistake is wanting to win at the same things your competitors are working on too.
- Which one is your priority? Rumelt says the principle is to focus on one problem, although companies always want two or three. He points out that "priority" means the thing that comes first, so a long list of priorities means not choosing. One example is a small city's plan that had 47 strategies and 178 actions.
Martin has one more recommendation: write down what would have to be true for this strategy to work. Then keep watching those things, and adjust the strategy wherever it becomes necessary.
A small business strategy example: a furniture workshop
This example is hypothetical, and its numbers are hypothetical too. Picture a furniture workshop with twelve people.
| Question | Weak answer | Better answer |
|---|---|---|
| Where are we going? | We want to sell more. | Three years from now, to be the regular furniture supplier of ten hotels and guesthouses in our own province. |
| Why? | Because the market is good. | Because we want small hotels to have a supplier they can rely on for small-quantity orders. This is work we are good at. |
| How? | We'll advertise more. | We put our focus on hotels and guesthouses, with three base models that can be adapted, delivery in thirty days, and a price slightly above the market. |
The owner of the workshop writes down four more things:
- The most important obstacle: Hotels don't know us, and we have no samples of our work to show.
- What we won't do: Large orders that would upset the thirty-day delivery. We will also stop selling single pieces to households after the third contract with hotels.
- The priority for the next twelve months: Signing contracts with the first three hotels. For that, samples of the three base models have to be built first. Who is responsible for it, and by when, is also decided.
- What has to be true: There are enough small hotels in the province with repeat orders, and these hotels are willing to pay a slightly higher price for reliable delivery.
All of this fits on one page.
How to develop a business strategy in five steps
- Write down where you stand today. What you sell, to whom, and how the business is going right now. A UK guide for businesses also starts planning with this same question: where are you now? The answer has to be realistic and strict.
- Answer the three questions. Each one in one or two sentences.
- Write down the most important obstacle, what you will not do, and what has to be true.
- Choose one priority for the next twelve months. If that isn't possible, two or three at most. For each priority, set a person responsible, a timeline, a budget, and a number that shows the work is moving forward.
- Review. BDC suggests this order: a monthly meeting to follow up on the work, a deeper review every three months, and every year a new action plan for the following twelve months. In these same reviews, check whether the things you assumed are still true.
Two points about these steps:
- Keep it short. Martin says it is all the better if the strategy is written on one page.
- Don't put the work on your own shoulders alone. According to BDC, the worst case in implementation is when only the CEO sees the plan as their own.
How a strategy differs from a goal, an action plan and a business plan
| What it means | |
|---|---|
| Goal | The result you want |
| Strategy | The choices that get you to that result |
| Action plan | The tasks, who is responsible for each one, and the timeline |
| Business plan | A description of how the company is run day to day; for a new business, an explanation of the return on investment for the bank and the investor |
Common mistakes in creating a strategy
- Putting a financial goal in the place of a strategy. Instead, write down which obstacle you are removing.
- Too many priorities. Rumelt tells of a client who had 12 priorities. Choose one.
- Competing on the same things your competitors are working on. Instead, write down what you will not do.
- Filling in the vision and mission template without facing the main problem.
- Not reviewing. According to BDC, the lack of regular meetings is one of the main reasons for trouble in implementation.
If you are stuck on the "how"
If you know the "where" and the "why" and are stuck on the "how", a consultant can show you the way. Before the contract, ask them these questions.
Sources
- Richard Rumelt, The perils of bad strategy, McKinsey Quarterly
- Richard Rumelt, Why bad strategy is a social contagion, McKinsey
- Roger Martin, The difference between a plan and a strategy (podcast), Harvard Business Review
- Michael E. Porter, Slides from the talk "Strategy: Creating and Sustaining Competitive Advantage", Harvard Business School
- Strategic planning demystified, Business Development Bank of Canada (BDC)
- 5 tips for implementing your strategic plan, BDC
- Defining your mission statement, BDC
- Key elements of strategic planning, nibusinessinfo.co.uk
- Set goals for your business, business.gov.au
If you were asked today where your business is going, what would you answer in one sentence?
Write back to me