How even the smallest company can employ strategic thinking and planning.
Small businesses can benefit from some of the same management principles and techniques that large businesses use, and none is more important, more fundamental and less understood than the need for developing a business strategy that guides all business decisions. In this article we’ll discuss strategic planning and how you can use this knowledge to operate a more effective and efficient business to meet your business and personal goals.
Strategy Defined
Developing a strategy can be made simpler by using a military style approach. Your strategy determines what kind of “army” you will need. How will your command staff be set up? How will your forces be structured (army, corps, division, regiment, battalion, etc.)? What weaponry will you use? What will be your engagement strategy? What are the reasons you will fight?
These are broad, fundamental issues that define your organization and your purpose and how you will act as a whole. Then there are tactics. Tactics, in the military sense, determine how you actually fight today. How will you attack this objective given the current circumstances and environment? What adjustments have to be made to your standard tactical plan for all engagements to accommodate this situation? Which forces will we commit first and which will be held in reserve?
Strategy for Furniture Retailers
Most large retailers exhibit some strategic thinking and planning while smaller businesses generally don’t. Both kinds of businesses often operate primarily on a tactical basis, rooting their management style and decisions in store operations and merchandising. I am aware of only one large retail company in our industry that represents strategy as a function on the highest executive level.
How can even the smallest company employ strategic thinking and planning, and even more important to this discussion, why is this a vital business activity?
Defining what kind of company you will be, depends on the visions and goals of the owners. Some owners may want to build a business that can be sold at some time in the future. Others may want to build a long-term family business to ensure income and quality of life for future generations. Still others may simply be using the business to pay for real estate or be using sales to provide credit income. Whatever the goals of the owner, the business has to serve those interests.
In large, publicly held companies, increasing stock value and earnings will be a major goal, and here too, the business has to serve the goals of the stockholders. Where this accountability to stockholders exists, we are more likely to find strategic thinking and planning driving the decisions regarding operations. Where no such external accountability exists, we almost never find a clear strategy statement determining how things are structured or how systems are deployed.
The Role of Strategy in Small Businesses
When the main business strategy has been defined and communicated, decisions up and down the organization are made in light of the strategy. Departments such as merchandising, sales, operations, service and finance all can develop their individual operational strategies to support the main business strategy. The strategy document for the company acts as the guide for how processes, systems and information are handled in the organization. These are the tactical issues.
Strategy in Selling
A well designed and communicated business strategy ensures that as new people are brought into the organization they will adopt the company’s strategy and not impose alien strategies brought from other companies on your organization. This is most easily seen in the sales department. If no selling strategy exists as to how customers will be engaged and served by all salespeople, each salesperson will develop and employ his or her personal selling strategy in dealing with your customers. This effectively takes control of the point of contact out of the owner’s or manager’s hands and puts it into the salesperson’s hands.
Very often salespeople come to you from retail stores like your own. In the absence of a defined selling strategy in your store, these salespeople will serve your customers based on the strategies of your competitors. If not that, then your customers are served through the strategy of each individual salesperson. As a result, your total success or failure depends on strategies you don’t understand, haven’t developed for yourself, don’t observe and can’t manage. Even if you do have a personal strategy for your business, it will have little meaning unless you bring it down through the organization to drive decisions and actions at all levels.
This is also a reason why most sales training fails. Training has to be based in strategy to be successful and that strategy has to be pervasive in the organization, driving all decisions. Take away the strategy and training becomes a personal affront to the salespeople who think their personal selling strategy is right – at least, right for them, and that you have no right to demand that they change their strategy.
When thinking about the importance of strategy and its usefulness in your company, ask yourself this question: When starting your business or taking over its management, would you have said to this group of salespeople, "You all decide how you want to do business and whatever you decide is OK with me. You don’t even have to tell me what you decide." Sounds absurd, doesn’t it? Yet this is exactly what you do every day that you operate with no strategy in place.
Strategy in Merchandising
This is an area where there is the most disconnection between the strategies of the two primary front-end aspects of retail businesses: merchandising and sales. Does your merchandising strategy match your selling strategy? Does your merchandising strategy match your customer? Are all purchases made in alignment with a cohesive strategy that brings the right products and prices together in the right mix to allow your sales force to employ your selling strategy and meet the needs of the most customers in your target market?
Often, merchandising strategy is based more on long-term vendor relationships or competitive distribution issues than on a well thought out business strategy that is written down and communicated throughout the organization. Even with this said, merchandising is more likely to operate under some kind of strategy relating to price points and quality levels than is sales, which usually has no strategy at all.
The big question in establishing a merchandising strategy is whether to base the strategy on what kind of store you want to be, rather than what your customers want you to be. It’s the difference between being merchandise-driven and being customer-driven. Most owners and buyers in small businesses buy what they like or what they have always bought. Or, they buy from the same vendors year after year laboring under the opinion, in many cases, that the devil you know is better than the one you don’t. However, the market is dynamic and ever changing and your consumer changes too.
The Importance of Research
It is impossible to revisit and review a non-existent strategy. This is one major reason that many store owners find their businesses floundering or not growing even in times of vigorous economic expansion. Merchandise strategies should be based on consumer research. This information should not be national in scope. It should be local information, gathered from consumers in your market. Selling strategies should also be based on research, but not merchandise-based research that tells you what consumers want to buy, but relationship-based research that tells you how they want to be treated when they buy. Then, when you have all the results, you can develop a strategy to give your customers what they want.
Some Things We Know
All of these comments are critical of stores that operate with no strategies in place and no overriding business strategy to guide decisions, behavior and performance. Being critical is easy, but when we look at things we know to be true, then criticism takes on more meaning. A few seasons ago a well-publicized industry research study showed that as many as 40% of furniture shoppers made the trip to the store, but did not ever make the purchase. They didn’t buy at all and while they may have come back into the market at some future time, other factual numbers tell more of a story.
Research and extensive experience in hundreds of stores shows that close ratios on the number of trips made to stores by consumers are below 20%. Eighty percent of all customer contacts in our stores result in no sale being made. This is, of course, the average for all salespeople, meaning that there are some (about half) who perform better, and half who perform below that figure. Think about that. Half of all salespeople sell fewer than 20% of the number of customers they engage.
I have not seen one company that had a management strategy to improve this performance. Even when the company knew the facts of the situation, there was no strategy that would cause actions to be taken to address the problem. They just keep giving these under-performing people more opportunities to under-perform. And here’s the worst part: these under-performing people are the most resistant to adopting new methods and techniques – the most resistant to training - because to them, they have successfully made sales using their own strategy and techniques.
Management Strategy
How are the people in your company managed by their supervisors? Is there a management strategy for consistent performance improvement? Is there a compensation strategy in place spelling out the accountability of middle and high-level managers for the performance of their areas and the company as a whole?
Where to Begin
Call your highest level managers together and ask them some of the questions in this article. Look at performance of all merchandise and all people and pay attention to the range of performance, low to high. Ask what is being done to improve the lows and maintain the highs. If some merchandise under-performs (meaning that the GMROI is below your store average) and some salespeople under-perform (meaning that their average sale and/or close ratios are below store average) and no action plans are in place to fix these situations, could it be that something is wrong at the strategy level?
When looking at measurements such as close ratio and average sale, be aware that close ratio is easily manipulated unless traffic counts are consistent and accurate. Average sale is usually not open to manipulation. Think about the customers who did not buy. Was it because of the merchandise selection or the sales relationship?
Look at your assortment plan in relation to GMROI. Is there a correlation between items and groups that fall outside your core lineup (and core customer) and low performance? These are the kinds of examinations that should be undertaken at the executive level to begin to establish a cohesive business strategy for the company and sub-strategies for all departments. Performance should be one key factor in building your strategy. Customers should be another.
The third factor should be your needs as the owner of the business. Most companies that have no operational strategy are owner-centered and are highly dependent on the owner for day-to-day decisions and operations. Without the owner, there is no value in the business. With a clearly stated strategy in place it is possible to develop or employ systems to run the business. Decisions can then be moved down the organization, closer to the point of action. The company can be made less owner-centered, more productive, profitable and valuable by conforming to the strategy and bringing all processes, systems and tasks into alignment.