What is the Value of Planning to a Small Firm?

Small business owners are often told that they should prepare a business plan and that failing to plan is tantamount to planning to fail, but what is the evidence that having a business plan is likely to result in more success than not having one?

The majority of small business owners do not have a formal, written business plan and yet the perceived wisdom is that the possession of a business plan is a critical element in a small firm’s success or failure. As a business academic and consultant I am an advocate of business planning, but one might legitimately ask me what evidence can I show that such planning makes any real difference to business success? To address this question we undertook a detailed examination of the academic literature relating to small business planning in order to seek this evidence. What we found was rather surprising.

What emerges from a review of hundreds of research papers published over the past forty years is that there is a lack of any clear and consistent evidence that demonstrates a link between possession of a formal, written business plan and success in the small firm. It is also not clear precisely what factors contribute to the success or failure of such businesses. The reasons for this are complex, but much of the problem is caused by a lack of appropriate definitions of what planning within a small firm is, how planning works, and what is success or failure in a small firm. Even getting a universally accepted definition of what a small business is remains difficult due to the way such firms are defined around the world.
 
However, a few things do emerge from the body of past research. First, the key problems facing most small business owners are that they have limited resources, time and means to do any planning, and often limited knowledge and skills in how to plan. Most focus on only one product or market and there is a tendency for planning to overload or overwhelm many owner-managers. Second, the small business owner is fortunate in that they are often very close to their customers and have the opportunity to get first hand feedback on how they are performing. As the firm’s main, and often the only, source of strategic direction, the owner manager is the key to any planning and the subsequent coordination and motivation of any employees. Unlike larger firms, the small business can adapt and change very quickly if required.
 
The key variable in the small business planning process is therefore the owner-manager and the value of any planning is likely to depend on how they think and act. There is a relationship between the visionary leadership and managerial competence of the owner-manager, and their ability to configure their firm’s limited resources to exploit opportunities and meet threats. A key to the success of the small firm is less the presence of a formal, written business plan; than the owner-manager’s ability to create a clear vision for their firm and to use innovation to exploit future opportunities with limited resources. Having a business plan is useful and writing a plan provides structure and discipline. However, the value it offers depends on the ability of the owner-manager to think and act strategically; and use their proximity to the customer to shape innovative responses that build loyalty and repeat business. If required, the owner-manager should also be prepared to completely reinvent their business from time to time, as this is much easier for a small firm than a large one.
 
As you look at your own business ask the following questions:
 
  • Where do you want your business to be in say three to five years time?
  • What are the key opportunities and threats that you might face over this time period?
  • What will you need to change in your business to achieve this vision?
  • What do customers think of your business and how it satisfies their expectations?
  • What operations must change to ensure that you meet and exceed these expectations?
 
This article was first published in WA Business News.
 
©Tim Mazzarol (2010)